€-" 


American  BugJmegf^  ^mt0 

ROSWELL  C.  McCREA 

GENEIiAL   EDITOR 


Hmerican  Busineee  Series 

Under  the  Editorship  of 
RoswELL  C.  McCrea,  Columbia  University 

Economic  History  of  the  United  States 

By  T.  W.  Van  Metre,  Columbia  University- 
Business  Ownership  Organization 

By  Archibald  H.   Stockder,  Columbia  University 

Outlines  of  Accounting 

By  William  S.  Krebs,  Washington  University,  St.  Louis 

Manpower  in  Industry 

By  E.  S.  CowDRicK 

Our  Competitors  and  Markets 

By  A.  W.  Lahee,  Consultant  on  Foreign  Markets 

Making  Use  of  a  Bank 

By  J.  A.  Fitzgerald,  Ohio  State  University 

International  Trade  Finance 

By  George  W.  Edwards,  New  York  University 

Discount  Policy  of  the  Federal  Reserve  System 
By  B.  H.  Beckhart,  Columbia  University 

The  Shoe  Industry 

By  Frederick  J.  Allen,  Harvard  University 

The  Transportation  Act,  1920 

By  Rogers  MacVeagh,  of  the  New  York  and  Oregon  Bars 

Advanced  Accounting 

By  William  S.  Krebs 

Our  Financial  Reformation 

By  Chester  A.  Phillips,  University  of  Iowa 

Statistical  Methods 

By  Frederick  C.  Mills,  Columbia  University 

Money  and  Banking 

By  William  H.  Steiner,  College  of  the  City  of  New  York 

Business  Economics 

By  Ray  B.  Westerfield,  Yale  University 

Labor  Economics 

By  Solomon  Blum,  University  of  California 

Theory  of  Accounts,  Volume  I 

By  Dr  Scott,  University  of  Missouri 

Industrial  and  Commercial  Geography,  New  Edition 

By  J.  Russell  Smith,  Columbia  University 


BUSINESS   OWNERSHIP 
ORGANIZATION 


BY 

ARCHIBALD   H.   STOCKDER,   M.A, 

COLUMBIA   UNIVERSITY 


NEW  YORK 

HENRY  HOLT  AND  COMPANY 

1922 


COPTRIGHT,    1922, 
BY 

HENRY  HOLT  AND  COMPANY 

November,  1928 


PRINTED   IN   U.  S.  A. 


HH 


PREFACE 

The  subject  of  business  organization  has  usually  been 
approached  from  one  of  two  points  of  view.  The  first  of 
these  approaches  is  from  the  standpoint  of  the  principles 
and  problems  involved  in  building  up  the  legal  form  of  or- 
ganization under  which  the  business  is  to  be  owned,  and 
that  bear  upon  the  relations  of  the  entrepreneur,  the  cred- 
itor and  third  parties  to  one  another  and  to  the  business 
establishment  itself.  The  second  strikes  the  problem  from 
the  angle  of  the  technique  involved  in  making  those  internal 
arrangements  that  are  necessary  or  desirable  to  secure  effi- 
ciency in  the  administration  and  operation  of  the  enter- 
prise. For  the  sake  of  brevity,  we  shall  call  the  subject- 
matter  of  the  first  ownership  organization  and  of  the  second 
administrative  organization.  It  is  the  former  with  which 
this  work  has  to  do. 

Most  writers  on  the  subject  of  ownership  organization  in 
business  have  been  lawyers,  a  circumstance  which  has  so 
influenced  their  work  that  they  have  almost  invariably 
hmited  their  writings  to  a  consideration  of  the  legal  aspects 
of  parts  of  this  broad  subject.  Thus  we  have  numerous 
treatises  on  the  law  of  partnership,  on  corporations,  on 
trusts,  etc.,  that  are  intended  to  appeal  primarily  to  the 
student  of  law.  As  a  result  they  fail  to  interest  the  student 
of  applied  economics,  for  they  lack  that  broadness  of  view 
that  is  so  essential  to  a  full  understanding  of  the  intricacies 
of  organization  of  the  present  system  of  business  ownership. 

The  legal  institutions  that  form  the  basis  of  the  owner- 
sliip  forms  of  today  have  very  largely  developed  from  social 
custom,  in  consequence  of  which  they  differ  somewhat  in 
principle,  form  and  application  from  country  to  country. 

R  285764 


vi  PREFACE 

They  were  nearly  all  in  existence  long  before  the  industrial 
revolution  ushered  in  the  modern  era  of  big  business  enter- 
prise. They  had  to  be  adapted  to  meet  those  new  condi- 
tions that  were  brought  about  by  large  scale  production,  a 
widened  concept  of  business  capital  and  the  economic  forces 
driving  competing  business  establishments  into  monop- 
olistic and  semi-monopoUstic  combines.  These  powerful 
influences  have  played  a  far  more  important  part  in  shaping 
the  modern  forms  of  ownership  organization  than  can  be 
ascribed  to  legal  principles  and  differences. 

A  study  of  the  business  ownership  organizations  of  today 
is,  therefore,  something  more  than  a  mere  analysis  of  legal 
forms.  It  is  the  apphcation  of  these  forms  to  business 
uses  in  the  light  of  the  modern  industrial  system.  This  is 
the  point  of  view  that  has  been  uppermost  in  my  mind 
during  the  preparation  of  this  brief  exposition;  and  it  is  my 
hope  that,  through  this  work,  the  general  public,  as  well 
as  the  student  of  applied  economics  will  be  enabled  to  ob- 
tain a  clearer  picture  and  a  fuller  understanding  of  the 
ownership  of  business  than  has  heretofore  been  possible. 

A.  H.  S. 


CONTENTS 


PAGE 

PART  I.     ECONOMIC  AND  LEGAL   FUNDAMENTALS 

Chapter  I.    The  Concept  of  Capital  as  the  Foundation  of 

Ownership  Organization  in  Business 3 

The  Business  Establishment  Defined 3 

The  Private  versus  the  PubHc  Entrepreneur 3 

Function  and  Classification  of  Business  Establishments 4 

Social  Custom,  Business  Enterprise  and  Economic  Develop- 
ment    5 

The  Concept  of  Capital  and  its  Influence  upon  the  Ownership 

Organization 8 

1.  The  stage  of  goods  as  capital 9 

2.  The  money  capital  stage 12 

3.  The  securities  capital  stage 16 

Influence  of  Large-Scale  Production  and  Competition  on  Or- 
ganization    17 

Chapter  II.    The  Legal  Foundation  of  Ownership  Organi- 
zation in  Business 18 

The  Legal  Foundation 18 

Federal  Laws  and  Entrepreneurial  Organization 20 

State  Laws  and  Entrepreneurial  Organization 21 

Domestic  and  Foreign  Organizations 22 

Greater  Freedom  of  Common  Law  Organizations 22 

Comparative  Qualities  of  Ownership  Organizations 22 

(a)  Method  of  formation 23 

(6)  Liability  of  the  entrepreneur 23 

(c)  Ease    with    which    the    required    capital    may    be 

procured 24 

(d)  Durability  and  stabflity 25 

(e)  Ease  of  direction 28 

(/)  Onerous  obligations 31 

(g)  Legal  status 32 

{h)  Sphere  of  activity 33 

Classification  of  Ownership  Organizations 34 

vii 


viii  CONTENTS 

PAGE 

PART  II.    PERSONAL  OWNERSHIP  ORGANIZATIONS 

Chapter  III.      The     Individual    Proprietorship    and    the 

Participation  Association 39 

Personal  Ownership  Types 39 

The  Individual  Proprietorship 39 

The  Participation  Association 45 

Chapter  IV.  The  Partnership   52 

Definition 52 

Formation  —  The  Contract 53 

Legal  Nature  and  Legal  Actions 56 

Rights  and  Obligations  of  Partners  toward  One  Another ....  56 

Obligations  of  Partners  toward  Third  Parties 61 

Classification  of  Partners 63 

Sphere  of  Activity 64 

Dissolution  and  Termination          64 

Classification  and  Types  of  Partnerships 65 

L    Ordinary  partnerships 67 

2.  Limited  partnerships 67 

3.  Partnership  associations 67 

4.  Joint  stock  companies 68 

5.  Mining  partnerships 68 

6.  Sub-partnerships 68 

7.  Joint  adventures 69 

8.  Underwriting  syndicates 69 

Extent  of  Use 70 

Limitation  of  the  Partnership   71 


PART  III.    SECURITIES-ISSUING  ORGANIZATIONS 

Chapter  V.     The  Nature  of  Recttrities 77 

Theory  of  Impersonal  Organization 77 

Securities  are  a  Class  of  Commercial  Paper 80 

Money  paper 80 

Commodity  paper  81 

Investment  paper 81 

Ownership  paper 83 

Creditor  paper 84 

Non-securities 84 

Securities 85 

Extent  of  Use  of  Securities 86 

Transferability  of  Securities 92 

The  Principle  of  "  Securitization  "  of  Ownership 97 

Types  of  Securities-Issuing  Organizations 98 


CONTENTS  ix 

PAGE 

Chapter  VI.     The  Joint  Stock  Company 100 

Definition 100 

Formation 100 

Capitalization  and  Stock 102 

Internal  Organization 103 

External  Relations 105 

Permanence  and  Stability 106 

Value  and  Use 107 

Chapter  VII.     The   Corporation  —  Its    Nature   and    Es- 
sential Characteristics 109 

Definition 110 

Legal  Entity Ill 

Creation Ill 

Sphere  of  Activity 113 

Ownership  and  Liability 114 

Direction  and  Control 115 

Permanence  and  StabQity 116 

Onerous  Obligations 117 

Classification  of  Corporations 119 

Advantages  and  Disadvantages 120 

Chapter  VIII.    Corporate  Securities  and  Capitalization  . .  124 

The  Corporate  Securities 124 

Capital  stock 124 

Full-paid  and  part-paid  stock 126 

Treasury  stock 127 

Stock  classification 128 

Common  Stock 128 

Preferred  Stock 131 

Bonds  and  Corporate  Notes 135 

Classes  of  Securities  Ordinarily  LIsed 142 

Capitalization 143 

Chapter    IX.      The    Corporation  —  Formation,    Charter 

AND    By-Laws 150 

General  and  Special  Corporation  Laws 150 

Formation  of  Business  Corporations 151 

Who  may  incorporate 152 

Pre-incorporation  agreement 152 

Application  for  a  charter 152 

Certification  and  recording 154 

Organization  meetings 155 

Reversed  procedure 156 

"Cut  and  dried"  procedure 157 


X  CONTENTS 

PAGE 

The  Charter 157 

Main  features  and  provisions 158 

The  By-Laws 163 

Purpose  and  adoption  of  164 

Contents 165 

Chapter  X.    The  Corporation  —  Its  Operating  Mechanism  166 

The  Stockholders 167 

Powers  of  stockholders  as  a  body 168 

Classification  and  qualification   169 

Stockholders  of  record 170 

Transfer  agent  and  registrar 170 

Stockholders'  meetings 171 

Stockholders'  voting  trusts 175 

Protection  of  minority  stockholders 176 

The  Board  of  Directors 177 

Functions  of  the  board  of  directors 177 

Election,  term  of  office,  etc 178 

Number  and  qualifications  of  directors 179 

Compensation 181 

Individual  director's  relation  to  the  corporation 181 

Powers  of  the  board  of  directors 182 

Meetings 188 

The  Corporate  Officers 189 

General  executive  officers:  President  and  vice-presidents  190 

Treasurer 191 

Secretary 192 

Auditor 195 

Counsel 195 

Chapter  XI.    Use  of  the  Business  Corporation 197 

Types  of  Corporations 201 

The  Securities-Holding  Corporation 202 

Applications  of  the  Securities-Holding  Principle 204 

Subdivision  of  legal  title 205 

Substitution  of  securities   208 

Consolidation  of  corporations 209 

Chapter  XII.     The  Business  Trust  213 

General 213 

Definition 213 

Formation 214 

The  Trustees 215 

Trustees  as  managers 215 

Appointment,  removal,  successors 216 

Liability  of  trustees 217 

Right  to  sue  and  be  sued 219 


CONTENTS  xi 

PAGE 

Relation  to  court  of  equity 220 

Compensation  of  trustees 220 

The  Beneficiaries 220 

Rights  and  powers  of  beneficiaries 221 

Liability  223 

Transferabihty  of  interest 223 

The  Trust  Capital 224 

Rights  of  Creditors 229 

Other  Trust  Features:  Duration,  scope  of  activity,  etc 227 

Business  Uses  and  Types 229 

The  trust  agreement 229 

Types 232 


PART  IV.    COMBINATIONS  OF  OWNERSHIP 
ORGANIZATIONS  IN  BUSINESS 

Chapter    XIII.     Business    Combination  —  Its  Causes  and 

Forms 237 

Causes  of  Combination  and  Concentration 238 

Direction  in  which  Combination  may  take  Place 244 

Classification  of  Combination  Organizations 253 

Chapter   XIV.     Combinations   Ordinarily    not    Based    on 

Ow'NERSHip  Rights 256 

A.  Associations  as  Business  Combinations 256 

General  commercial  associations 258 

Trade  and  industrial  associations 259 

Special  purpose  associations 259 

Tendency  to  federate  for  purpose  of  control 261 

B.  Factors'  Agreements  as  Instruments  of  Combination 262 

Conditional  requirements 262 

Exclusive  arrangement 263 

Preferential  arrangement 264 

C.  Federations 265 

The  American  pools 265 

1.  Percentage  division  of  business 266 

2.  Curtailment  of  output 268 

3.  Territorial  division  of  market 269 

4.  CentraHzed  or  joint  sales  plan 270 

5.  Centralized  purchase  of  total  supply  for  resale 272 

6.  Price  fixing  pools 273 

7.  Patent  pools 276 

8.  Open  price  pools 277 

The  Kartell  or  Sradicate 278 

Types  of  kartells 280 


xii  CONTENTS 

PAGE 

Integration  by  kartells 284 

Distribution  of  kartell  organizations 285 

Effect  of  Federation  Organizations  upon  Industry 286 

Chapter  XV.     Securities-Substitution  —  Investment  Com- 
panies    292 

Participation  as  an  Application  of  the  Principle  of  Substi- 
tution    292 

Kinds  of  participation 293 

Investment  Companies 296 

English  investment  companies 296 

American  investment  companies 299 

Investment  companies  in  other  countries 301 

Criticism 302 

Chapter  XVI.    Principles  of  Control 303 

The  instrumentalities  of  control 303 

Contract  control 305 

Participation  control 307 

Instruments  of  participation  control 308 

Modes  of  participation  control 310 

Chapter  XVII.     Control  Companies 318 

A.  Trusts  as  Control  Companies 318 

The  Standard  Oil  Trust  of  1882 319 

The  Whiskey  Trust 321 

Legal  status 321 

Present-day  holding  trusts 322 

B.  Holding  Corporations  as  Control  Companies 323 

The  Control  Corporation  among  the  American  railroads  327 

The  Harriman  System 328 

The  Queen  and  Crescent  Route 333 

Control  corporations  among  public  utilities: 335 

The  American  Telephone  and  Telegraph  Company.  .  335 

Control  corporations  among  industrials: 337 

The  Standard  Oil  Company  of  New  Jersey 339 

The  United  States  Steel  Corporation 341 

The  Control  company  in  ocean  transportation : 345 

The  International  Mercantile  Marine  Company 345 

Mercantile  control  companies : 347 

The  control  company  in  other  countries 348 

Advantages  and  weaknesses  of  the  control  company .  .  349 

Chapter  XVIII.    Finance  and  Assumption  Companies 356 

Promotion 356 

What  Constitutes  Financing  a  Company 357 


CONTENTS  xiii 

PAGE 

General  Finance  and  Assumption  Companies 358 

Special  Finance  and  Assumption  Companies  359 

American  finance  and  assumption  companies 361 

Finance  and  assumption  companies  in  Germany 368 

Finance  and  assumption  companies  in  other  countries.  .  376 

Evaluation  of  Finance  and  Assumption  Companies 378 

Chapter   XIX.      The    Growth    and    Development    of    a 
Monopolistic  Control  Company  —  The  American 

Tobacco  Company 383 

The  tobacco  industry  prior  to  1890 384 

Amalgamation  of  five  cigarette  manufacturing  concerns  into 

the  American  Tobacco  Company  (1890) 385 

Enters  the  plug  tobacco  business  (Jan.,  1891) 386 

Enters  the  cigar  and  cheroot  business  (April,  1891) 386 

Enters  the  smoking  tobacco  and  snuff  business  (April,  1891)  386 
The  "plug  tobacco  war  "  and  the  formation  of  the  Continen- 
tal Tobacco  Company,  (1898) 388 

Transfer  of  the  plug  business  to  the  Continental  Tob.  Co.  .  .  389 
The  Continental  Tob.  Co.  acquires  control  over  the  P.  Loril- 

lard  Co 389 

The  American  Tobacco  Company  increases  its  capitalization  390 

Power  and  control  of  the  American  Tob.  Co.  in  1898 390 

The  second  period  of  expansion  begins,  (1898)  390 

More  competing  concerns  are  acquired 390 

New  controlled  companies  are  organized 392 

The  snuff  business  is  transferred  to  the  Am.  Snuff  Co 392 

Enters  the  tinfoil  business,  (1899) 394 

Manufacturers  and  dealers  in  cigars  are  consolidated  and  the 

American  Cigar  Company  is  formed,  (1901) 394 

Secures  control  of  the  manufacture  of  licorice,  (1902) 395 

The  Am.  Stogie  Co.  is  formed  to  take  over  the  stogie  and 

tobie  business 396 

Enters  the  retail  tobacco  business  by  acquiring  the  United 

Cigar  Stores  Company 396 

Enters  the  English  market,  (1901) 397 

Enters  into  agreements  with  English  companies   to  divide 
the  world's  market.  —  The  British-American  Tobacco 

Company  is  formed,  (1902) 397 

The  Consolidated  Tobacco  Company  is  organized  to  cen- 

trahze  control,  (1901) 398 

The  Consolidated,  the  Continental  and  The  Old  American 
Tobacco    Co.  are    merged    into    the    new    American 

Tobacco  Co.,  (1904) 399 

The  Tobacco  Trust  in  1910,  (chart) 401 

Why  the  Supreme  Court  ordered  the  dissolution  of  the  to- 
bacco combine 402 


XIV  CONTENTS 

PAGE 

PART  V.    ABUSES  OF  OWNERSHIP  ORGANIZATION 
AND  ATTEMPTS  TO  REMEDY  THEM 

Chapter  XX.     Abuses  and   Weaknesses  of  the  American 

System 407 

The  Acts  and  Abuses  Leading  to  Criticism 408 

1.  Administrative  abuses 408 

2.  Abuses  arising  out  of  methods  of  promoting  and  fi- 

nancing companies 411 

(o)  Unwise  promotion 412 

(6)  Over-Capitalization 413 

(c)  Influence  of  the  life  insurance  companies 414 

(d)  Supporting  the  market 414 

(c)  Profits  of  underwriting 415 

(/)  Promoters'  profits 416 

3.  Abuses  in  Financial  Management 416 

(a)  Financial  readjustments 417 

(b)  Conversions 419 

(c)  Reorganizations 420 

(d)  Dividend  policies 421 

4.  Speculation 423 

5.  Unfair  competition 427 

(a)  Local  price  cutting 428 

(6)  Bogus  competing  concerns 428 

(c)  Fighting  instruments 428 

(_d)  Exclusive  and  restraining  contracts 429 

(e)  Rebates  and  preferential  contracts 429 

(/)  Exclusive   control   of  machinery  used  in  manu- 
facturing processes 429 

(g)  Blacklisting  and  boycotting 429 

(h)  Intimidation  and  interference 429 

(i)  Manipulation  of  markets 430 

Monopoly  and  Combinations  in  Restraint  of  Trade 430 


Chapter    XXI.      Present   and   Proposed   Regulation    and 

Reform 432 

State  Regulation  and  Control 432 

Corporate  control 432 

Responsible  management 4S3 

Capitalization 433 

Systematic  reform 434 

The  "Seven  Sisters  "  of  New  Jersey 435 

"Blue  Sky  "  laws 437 

Uniform  Stock  Transfer  Act 439 


CONTENTS  XV 

PAGE 

Federal  Regulation 439 

Legislation  regulating  transportation  companies 439 

The  Interstate  Commerce  Commission  Act  of  1887 .  .  440 

The  Elkins  Act  of  1903 440 

The  Hepburn  Amendment  of  1906 440 

The  Transportation  Act  of  1920 440 

Federal  anti-trust  legislation 442 

The  Sherman  Anti-Trust  Law  of  1890 442 

The  Anti-Trust  Amendments  of  the  Wilson  Tariff  Act 

of  1894 443 

The  P'ederal  Trade  Commission  Act  of  1914 444 

The  Clayton  Act  of  1914 446 

The  Webb  Act  of  1918 447 

The  War  Finance  Corporation  Act  of  1918 448 

Our  Future  Policy 449 

What  should  be  done 450 

How  it  should  be  done 453 


PART  VI.    SUPPLEMENTARY  FORMS  AND    DOCUMENTS 

A.  Forms  Pertaining  to  the  Partnership 461 

Form  1.    Partnership  Agreement 461 

Form  2.    Notice  of  Dissolution  of  Partnership 466 

Form  3.    Notice  of  a  Partner's  Withdrawal 466 

B.  Forms  Pertaining  to  Securities-Issuing  Organizations  467 

Form  4.    Articles  of  the  Pierce-Fordyce  Oil  Association 

(Joint  Stock)  467 

The  Corporation 473 

Form  5.    General  Contract  to  form  a  Corporation 473 

Option  Agreements 475 

Form  6.    Option  on  Business  and  Property 476 

Form  7.    Option  on  Stock 478 

Subscription  Lists 478 

Form  8.    Simple  Subscription  List 478 

Form  9.    Trustees'  Subscription  List 479 

Certificate  of  Incorporation 479 

Form  10.    Charter  of  the  Fit-Well  Clothing  Corporation  480 

Object  or  Purpose  Clauses 482 

Form  11.    Automobiles 483 

Form  12.    Department  Store 483 

Form  13.    Hardware  Manufacture  and  Sale 483 

Form  14.    Grocery 484 

Form  15.    Mining 481 

Form  16.    Investment  Brokers 485 


xvi  CONTENTS 

PAGE 

Special  Stock  Clauses 485 

Form  17.    Capital  Stock  of  No  Par  Value 485 

Form  18.    Preferred  Stock  of  No  Par  Value    486 

Form  19.    Non-Cumulative  Preferred  Stock 486 

Form  20.    Representative  Types  of  Preferred  Stock.  .  .  .  486 

Forms  of  Stock  Certificates 488 

Form  21.    Common  Stock  Certificate 489 

Form  22.    Certificate  of  Preferred  Stock 491 

Form  23.    Certificate  of  Common  Stock  giving  Terms  of 

Preferred  Issue 493 

Form  24.    Certificate  of  Common  Stock  without  Par 

Value 494 

Lost  Certificates 495 

Form  25.    Notice  of  Stoppage  of  Transfer 495 

Form   26.    Bond   of   Indemnity   for   Re-Issue   of   Lost 

Certificate 495 

Bond  Forms 496 

Form  27.    Mortgage  to  secure  Bonds,  Short  Form 497 

Form  28.    Simple  Form  of  Bond  Certificate 501 

Forms  Pertaining  to  Administrative  Organization 

Form  29.    By-Laws  of   the  United  States  Steel   Cor- 
poration    503 

Voting  Trust  Forms 518 

Form  30.    Voting  Trust  Agreement    519 

Form  31.    Voting  Trustees'  Certificate 521 

Forms  Relating  to  Stockholders'  and  Directors'  Meetings  522 
Form   32.    Call   and   Waiver   to   bring   together   First 

Meeting  of  Stockholders 523 

Form   33.    Notice  of  Regular  or  Annual   Meeting  of 

Stockholders 524 

Form    34.    President's    CaU    for     Special    Meeting    of 

Stockholders 525 

Form  35.    Stockholders'  Request  for  Special  Meeting. . .  526 
Form  36.    Special  Meeting  of  Stockholders  by  Call  and 

Waiver 527 

Form  37.   Directors'  Resolution  for  Special  Meeting —  527 

Proxies 528 

Form  38.   General  Unlimited  Proxy 528 

Form  39.    Revocation  of  Proxy 528 

Election  Forms 529 

Form  40.    Oath  of  Inspectors  of  Election 529 

Form  41.    Inspectors'  Certificate  of  Election 530 

Form  42.    Notice  of  Election 530 

Form  43.    Oath  of  Officers 531 

Bond  of  Treasurer 532 

Form  44.   Treasurer 's  Bond  of  Indemnity 532 


CONTENTS  xvii 

PAGE 

Dividend  and  Financial  Forms 533 

Form  45.    Directors'  Resolution  Declaring  Dividend  . .  .  533 
Form  46.    Resolution  Declaring  Dividend  on  Preferred 

Stock  only 533 

Form  47.    Treasurer's  Notice  of  Dividend 534 

Form  48.    Notice  of  Property  Dividend 534 

Form  49.    Short  Financial  Statement  of  a  Corporation  .  535 

Corporate  Signatures 536 

Form  50.    Official  Signatures 536 

Form  51.    Corporate  Signature  —  Informal 537 

Form  52.    Corporate  Signature  —  Formal 537 

Sale  of  Assets  and  Dissolution 537 

Form  53.    Stockholders'  Resolution  of  Entire  Assets  .  .  .  538 

Form  54.    Directors'  Resolution  of  Entire  Assets 538 

Form  55.    Notice  of  Dissolution 539 

Trust  Agreement  of  a  Lawful  Business  Trust 

Form  56.    Agreement  and  Declaration  of  Trust  of  the 

Massachusetts  Gas  Companies 540 

C.  Forms  Pertaining  to  Combination  Organizations 555 

Form  57.    Factor's  Agreement  of  the   National  Wall 

Paper  Co 555 

Form  5S.   Typical  Pool  Agreement  —  The  Steel  Rail 

Pool  of  1887 557 

Form  59.    The  Standard  Oil  Trust  Agreement  of  1882. .  560 

Form  60.    Directors'  Resolution  for  Consolidation 571 

Form  61.  Stockholders'  Resolution  Authorizing  Con- 
solidation    573 

Form  62.    Charter  of  an  Industrial  Control  Company  — 

The  United  States  Steel  Corporation • 573 

Form  63.    Charter  of  a  Securities  Holding  Company  — 

The  Northern  Securities  Company 581 

D.  Governmental  Regulation 586 

Form  64.    The  Sherman  Anti-Trust  Act  of  1890 586 

Form  65.    Anti-Trust  Act  of  the  State  of  Kansas,  1889.  588 
Form  66.    Blue  Sky  Law  of  the  State  of  Maryland  of 

1920 589 


CHARTS  AND   ILLUSTRATIONS 

PAGE 

1.  Distribution  of  Stockholders  of  a  Large  Corporation 168 

2.  Direction  of  Combination  in  Industry 245 

3.  Pyramided  Control 313 

4.  Diagram   Illustrating  the  Formation  of  the  Standard  Oil 

Trust  of  1882 319 

5.  Chart  Showing  Types  of  Intercorporate  Control 325 

6.  Railroad  Companies  of  the  Harriman  System  inlQll 331 

7.  Intercorporate  Relations  of  the  Queen  and  Crescent  Route 

in  1906 334 

8.  A  Public  Utility  Control  Company 337 

9.  An  Industrial  Control  Company 344 

10.  A  Marine  Transportation  Control  Company 346 

11.  Assumption    and    Finance    Companies    Subsidiary    to    the 

General  Electric  Company 365 

12.  Assumption  and  Finance  Companies   of  the   Lenz   Group 

of  Germany 375 

13.  The  Tobacco  Trust  in  1910 401 

14.  Chart  Showing  the  Close  Interrelation  between  the  Rail- 

road, Railroad  Equipment  and  Financial  Companies  of 

the  United  States  in  1920 Op.  417 


PART  I 
ECONOMIC  AND  LEGAL  FUNDAMENTALS 


CHAPTER   I 

THE    CONCEPT    OF    CAPITAL    AS    THE    FOUNDATION    OF 
OWNERSHIP    ORGANIZATION    IN    BUSINESS 

The  Business  Establishment  Defined.  —  When  we  seek 
to  secure  profits  through  some  organized  activity,  we  have 
a  business  undertaking  or  establishment.  It  may  be  de- 
fined as  a  complex  of  labor  and  capital  brought  together 
and  directed  by  an  entrepreneur  for  the  purpose  of  profit. 
Labor,  under  this  definition,  includes  all  human  effort, 
whether  mental  or  physical,  directed  toward  the  prosecu- 
tion of  the  enterprise.  Capital  includes  all  money  and 
securities,  natural  resources  and  products,  other  than 
labor,  that  are  used  in  the  business.  The  head  of  the 
enterprise  is  called  the  entrepreneur  by  economists.  He  is 
the  one  who,  besides  risking  his  capital,  or  command  over 
capital,  in  the  venture  assumes  the  final  responsibility  for 
its  management  and  direction.  However,  under  present- 
day  conditions,  business  is  in  large  part  conducted  by 
groups  of  individuals  combined  into  an  organization,  such 
as  a  corporation,  a  partnership,  a  joint  stock  company  or 
some  other  form.  These  organizations  may  therefore 
properly  be  considered  entrepreneurial  or  ownership  or- 
ganizations. It  is  of  such  organizations  that  this  work 
treats. 

The  Private  versus  the  Public  Entrepreneur.  —  While 
the  entrepreneur  is  ordinarily  a  private  person  or  an  asso- 
ciation of  persons,  this  is  not  always  the  case.  A  munic- 
ipal, state  or  national  government  may  become  an  entre- 
preneur by   going  into   business.     European  governments 

3 


4      ECONOMIC    AND    LEGAL    FUNDAMENTALS 

have  frequently  done  this,  but  in  the  United  States  there 
has  been  a  marked  antipathy  toward  this.  Nevertheless, 
even  in  this  country,  many  municipalities  own  and  operate 
gas  plants,  electric  plants,  street  railway  systems  and  other 
enterprises.  And  during  the  recent  war  the  national  govern- 
ment went  into  shipbuilding  and  the  manufacture  of  muni- 
tions on  an  extensive  scale.  But  a  distinction  must  be 
made  between  the  government  as  an  entrepreneur  and  as 
an  operator.  The  act  of  the  government  in  taking  over 
the  railways,  the  telegraphs  and  the  telephones  and  other 
national  equipment,  and  operating  them  did  not  make  the 
government  the  real  entrepreneur  for  it  did  not  assume  the 
full  ownership  responsibility. 

The  Function  and  Classification  of  Business  Establish- 
ments. —  In  a  broad  sense,  the  function  of  the  business 
establishment  is  the  production  of  economic  goods  which 
may  be  used,  directly  or  indirectly,  to  satisfy  human  wants. 
It  is  ordinarily  conceived  to  include  the  production,  or  the 
purchase  and  sale  of  commodities  or  both,  that  is  to  say, 
manufacture  and  trade.  The  work  of  assembling,  trans- 
porting, storing,  grading,  assumption  of  risk  and  financing 
is  merely  incidental  to  the  chief  function,  but  even  these 
services  are  the  bases  for  a  vast  number  of  business  enter- 
prises. Others,  again,  render  different  services,  such  as 
advertising,  the  collection  and  dissemination  of  statistical 
data,  the  communication  of  ideas.  In  fact  it  is  almost  im- 
possible to  enumerate  the  vast  number  of  different  kinds  of 
business  undertakings  that  are  to  be  found  in  a  modern  in- 
dustrial country.  However,  for  the  purpose  of  convenience 
they  may  readily  be  classified  under  a  few  suggestive  heads. 
The  following  classification  is  one  that  is  usually  employed 
in  government  publications. 

1.  Agriculture,  animal  husbandnj  and  fisheries,  having 
to  do  with  the  growing,  raising  and  direct  appropria- 


THE    CONCEPT    OF    CAPITAL  5 

tion  of  vegetable  and  animal  products  for  human  con- 
sumption. 

2.  Mining  and  quarrying,  or  the  original  recovery  of 
the  useful  mineral  products  from  the  earth. 

3.  Manufacturing,  the  process  whereby  the  raw  prod- 
ucts of  the  first  two  groups  are  transformed  into 
consumable  products. 

4.  Construction,  the  work  of  creating  in  final  form  the 
more  or  less  permanent  equipment  of  a  country  such  as, 
buildings,  canals,  railways,  docks,  bridges,  industrial 
plants,  etc. 

5.  Transportation  and  other  public  utilities,  which 
include  the  operation  of  water,  gas,  and  electric  works, 
railroads,  telephone  and  telegraph  lines,  etc. 

6.  Trade,  comprising  the  purchase  for  sale  of  goods, 
wares  and  merchandise  by  retailers,  wholesalers,  com- 
mission men,  brokers,  factors,  etc. 

7.  Personal  service  including  the  professions,  amuse- 
ments, domestic  services,  etc. 

8.  Finance,  banking  and  insurance  and  similar  under- 
takings that  are  of  a  fiduciary  character. 

Social  Custom,  Business  Enterprise  and  Economic 
Development.  —  The  form  of  the  business  unit,  the  method 
by  which  it  conducts  its  operations,  the  privileges  that  it  en- 
joys, as  well  as  the  limitations  and  restrictions  placed  upon 
it  are  deep  rooted  in  the  social  and  economic  structure. 
Consequently  any  changes  in  social  concepts  and  customs 
or  in  economic  practices  are  bound,  in  the  course  of  time, 
to  bring  about  sympathetic  changes  in  the  business  unit. 
Social  and  economic  transitions  ordinarily  take  place 
gradually ;  but  at  times,  as  the  result  of  wars  or  other  unan- 
ticipated catastrophes,  they  may  be  extremely  rapid.  Thus 
we  find  the  hoary  institutions  of  private  property  and  in- 
heritance, which  are  the  foundation  stones  of  modern  busi- 


6       ECONOMIC    AND    LEGAL    FUNDAMENTALS 

ness  organization,  gradually  losing  their  dignity  as  rights 
and  assuming  the  plainer  garb  of  privileges.  For  the 
"  right  "  of  inheritance  is  now  limited  by  heavy  inherit- 
ance taxes,  while  the  "  right "  of  private  property  is 
subject  to  eminent  domain,  and  in  some  European  coun- 
tries it  is  being  threatened  with  the  imposition  of  so-called 
capital  levies  which  would  appropriate  a  large  share  of 
private  wealth  to  defray  the  obligations  of  governments. 
Indeed,  the  complete  abolition  of  these  two  institutions  has 
been  strongly  urged  by  the  Marxian  Socialists,  and  the 
Bolsheviks  and  others.  This  simply  illustrates  a  change 
in  social  concepts.  It  cannot  be  denied,  that  the  complete 
abolition,  either  of  one  or  of  both  of  these  institutions, 
would  have  a  very  marked  and  far-reaching  effect  upon  the 
form  of  the  business  unit,  in  that  it  would  take  business 
completely  out  of  the  hands  of  the  private  entrepreneur. 
We  have  but  to  bear  in  mind  the  demands  made  upon  the 
governments  of  the  United  States  and  of  the  United  King- 
dom for  the  nationalization  of  railways,  coal  mines,  and 
other  fundamental  industries,  to  realize  how  close  to  our 
daily  life  such  changes  are.  Social  changes  are  inexorable 
in  their  execution;  for  they  are  backed  by  the  force  of 
general  public  opinion  to  which  the  individual  must  in- 
evitably bow. 

But  it  is  not  social  custom  alone  that  determines  the 
nature  of  the  business  unit.  Many  types  of  business  forms 
are  the  direct  outgrowth  of  economic  development.  The 
great  industrial  plants  of  today  employing  tens  of  thou- 
sands of  workers  and  millions  of  dollars'  worth  of  machinery 
and  equipment  in  their  manufacturing  processes,  are  of 
relatively  recent  development.  Their  structure  rests  upon 
the  foundations  laid  by  the  great  mechanical  inventions  of 
the  latter  part  of  the  eighteenth  century  that  ushered  in  the 
industrial  revolution.  Prior  to  that  time,  manufacturing 
was  done  very  largely  by  hand  methods  in  the  home  of  the 


THE    CONCEPT    OF    CAPITAL  7 

worker  who  enlisted  the  services  of  the  members  of  his 
family  to  aid  him  in  his  work.  But  all  this  has  changed. 
Today  the  factory  system  dominates  our  industrial  life, 
markets  are  no  longer  limited,  but  are  world  wide,  competi- 
tion is  no  longer  domestic  but  has  become  international. 
It  would  have  been  strange,  indeed,  had  these  revolutionary 
economic  changes  brought  about  no  new  developments 
in  business  organization  and  practices. 

Economic  development  usually  proceeds  at  a  somewhat 
more  rapid  pace  than  change  in  social  customs  or  concepts. 
Inertia  and  stability  are  the  marked  characteristics  of  the 
latter.  We  do  not  like  to  change  our  mode  of  life;  and 
when  economic  forces  begin  to  press  upon  us,  we  are  in- 
clined to  appeal  to  the  political  institutions  that  we  may 
have  set  up  as  government  to  secure  legislation  against  the 
threatened  change.  In  this  we  attempt  to  retard  or  fore- 
stall the  inevitable  economic  development.  History  fur- 
nishes us  with  many  examples  of  laws  and  ordinances 
against  the  use  of  various  mechanical  appliances  introduced 
to  supplement  hand  manufacturing  processes.  Stringent 
laws  against  usury  were  passed  to  prevent  the  lending  out 
of  money  at  interest.  Trade  unions,  also,  were  vigorously 
suppressed  by  law  when  they  first  began  to  assume  im- 
portance. The  legal  fights  against  monopoly  of  raw  materi- 
als in  certain  industries,  and  of  markets  in  others,  is  still 
a  moot  question  of  the  day  in  the  United  States.  But 
legislation  cannot  definitely  block  general  economic  de- 
velopment when  the  latter  takes  place  normally  and  spon- 
taneously. In  such  cases  social  custom  will,  through  steady 
and  continual  pressure,  be  forced  into  a  new  mold,  finally 
tolerating  as  factors  in  the  social  system  economic  institu- 
tions that  it  found  it  difficult  or  impossible  to  suppress. 

Between  the  forces  of  economic  development  and  the 
counter  forces  of  social  custom,  we  find  the  business  insti- 
tution plastic,  yielding  to  pressure  applied  here  or  there 


8       ECONOMIC    AND    LEGAL    FUNDAMENTALS 

when  the  impelling  force  is  strong  enough,  and  resisting  if 
the  force  is  weak.  Under  these  conditions  plasticity  rather 
than  rigidity  characterizes  the  business  institution,  and 
scarcely  a  decade  passes  that  does  not  leave  some  mark  of 
change  upon  its  features. 

The  Concept  of  Capital  and  its  Influence  upon  the 
Ownership  Organization.  —  The  types  of  business  organi- 
zation employed  in  the  conduct  of  business  at  a  given  time 
are  simply  phenomena  attendant  upon  a  given  stage  of 
economic  development.  The  fundamental  element  that 
distinguishes  one  type  from  another  is  found  to  be  the 
relationship  that  exists  between  the  entrepreneur  and  his 
business  undertaking  as  well  as  the  character  of  the  capital 
risk  that  he  assumes.  The  concept  of  capital,  therefore, 
is  the  keystone  of  the  whole  arch.  Society  having  once 
fully  accepted  a  given  concept  of  capital  or  wealth  that 
has  arisen  out  of  economic  development  thereby  places  the 
stamp  of  approval  upon  the  particular  type  of  business 
organization  that  is  built  up  around  that  concept.  This 
does  not  mean  to  convey  the  idea  that  all  types  of  business 
organization  at  a  given  time  are  based  upon  the  latest  de- 
velopment in  the  concept  of  capital;  for  such  is  not  the 
case.  A  new  concept  of  capital  does  not  supplant  its  pred- 
ecessors but  rather  is  added  to  them.  For  this  reason  the 
types  of  business  organization  prevailing  today  are  the 
accumulated  products  of  economic  and  social  progress. 

In  order  to  enable  the  reader  to  understand  clearly  the 
distinctions  differentiating  the  several  types  of  present-day 
business  organization,  it  will  be  necessary  to  sketch  briefly 
the  development  of  the  economic  stages  based  upon  the 
changing  concept  of  what  constitutes  business  capital.  Be- 
ginning with  the  dark  ages  following  the  collapse  of  ancient 
civilization,  three  such  economic  stages  can  be  distinguished. 
First,  that  stage  in  which  the  concept  of  capital  is  restricted 
to  commodities;  second,  in  which  it  is  widened  to  include 


THE    CONCEPT    OF    CAPITAL  9 

money  in  addition  to  commodities ;  and  third,  in  which  it  is 
still  further  extended  to  include  securities  in  addition  to  the 
other  two. 

There  are  no  clear-cut  breaks  separating  one  of  these 
periods  from  another.  The  transition  is  gradual.  It  de- 
velops like  the  transportation  system  of  a  new  country.  At 
first  wagon  roads  are  sufficient  to  meet  its  requirements, 
and  to  give  it  access  to  the  outside  world,  but  it 
may  grow,  and  the  time  will  come  when  the  wagon  road 
will  no  longer  suffice.  A  railroad  is  now  constructed  to 
operate  side  by  side  with  former  means  of  transportation. 
Later  on  a  street  railway  system  or  a  canal  makes  its 
appearance.  Thus,  where  we  at  first  had  but  a  single 
avenue  of  trade  we  now  have  many.  The  great  volume 
of  business  will  naturally  follow  the  most  serviceable  chan- 
nel while  the  others  would  be  used  as  supplementary 
vehicles.  And  so  it  is  with  the  several  forms  of  ownership 
organization  that  are  in  use  today.  They  have  been  of 
gradual  development.  New  types  have  been  evolved  as 
new  needs  arose,  only  to  be  added  to  those  already  in  ex- 
istence. But,  before  these  new  types  can  be  used  effectively 
the  capital  concept  must  first  have  become  sufficiently 
broad  to  give  new  life  to  the  form.  To  trace  in  full  the  de- 
velopment of  the  concept  of  business  capital,  would  re- 
quire far  more  space  than  the  limits  of  this  work  permit. 
Consequently  only  the  briefest  and  simplest  explanation 
will  be  attempted. 

1.  The  stage  of  goods  as  capital.  —  This  first  stage  of 
economic  development  is  characterized  by  a  limitation  of 
the  concept  of  capital  so  as  to  include  only  goods  or  com- 
modities. A  man's  wealth  is  based  upon  his  possession  of 
things  and  he  is  spoken  of  as  rich  or  poor  according  to  the 
number  of  cattle,  acres  of  land,  bushels  of  wheat,  etc., 
that  he  owns,  without  ascribing  to  them  a  money  value. 
The  method  employed  in  effecting  business  transactions  in 


10     ECONOMIC    AND    LEGAL    FUNDAMENTALS 

this  stage  shows  a  gradual  transition  from  the  practice  of 
simple  exchange  of  one  commodity  for  another  to  trans- 
actions based  upon  money  as  a  common  medium  of  ex- 
change. For  convenience  let  us,  then,  divide  it  into  two 
periods:  (a),  the  simple  barter  period  and  (6),  the 
medium  of  exchange  period. 

(a)  The  barter  period.  —  In  the  barter  period  the  busi- 
ness transaction  consists  of  a  direct  exchange  of  one  good 
or  commodity  for  another  without  the  use  of  money.  The 
merchant  brings  his  wares  with  him  and  takes  away  those 
wares  for  which  he  has  exchanged  his  own.  The  diffi- 
culties standing  in  the  way  of  a  free  exchange  of  commodi- 
ties under  this  system  militate  against  any  pronounced 
development  of  commerce  and  tend  to  make  communities  as 
nearly  self-subsisting  as  possible.  Itinerant  merchants 
who  negotiated  single  transactions  were  fairly  common, 
and  the  practice  soon  grew  of  holding  periodic  fairs  to 
which  all  could  bring  their  surplus  products  to  barter  them 
off  for  what  they  might  happen  to  need.  Such  transactions 
ordinarily  necessitated  an  actual  contact  between  the  buyer 
and  the  seller,  a  personal  inspection  of  the  wares  and  an 
agreement  as  to  the  basis  of  exchange.  In  consequence  of 
these  difficulties,  permanent  business  establishments  such  as 
we  have  today  can  hardly  have  existed.  Barter  trading  is 
still  carried  on  in  civilized  communities  in  a  desultory 
way  and  with  the  uncivilized  natives  of  certain  parts  of  the 
world,  as  in  the  Kongo  region,  where  the  European  trader 
exchanges  his  glass  beads,  trinkets,  and  cutlery  for  ivory 
and  rubber,  and  among  the  African  natives  themselves. 
More  permanent  business  establishments  of  this  class  are 
the  fur  trading  posts  of  the  Canadian  northwest.  The 
amount  of  business  done  in  this  way  is,  however,  quite  in- 
significant when  compared  with  the  total  transactions  of 
any  industrial  country. 

(b)   The  medium  of  exchange  period.  —  In  the  second 


THE    CONCEPT    OF    CAPITAL  11 

period  of  this  stage  a  general  medium  of  exchange  is  intro- 
duced into  the  business  transaction  to  facilitate  trade.  At 
first  this  may  be  simply  a  product  common  to  the  com- 
munity. Thus  rice,  beaver  skins  and  tobacco  were  used 
for  such  a  purpose  by  the  early  English  colonists  in  North 
America.  This  good  then  becomes  the  measure  of  value 
for  all  others  while  it,  at  the  same  time,  retains  its  in- 
trinsic value.  Such  media  of  exchange  are  usually  some- 
what bulky  and  inconvenient,  and  are  eventually  dis- 
carded for  a  universal  medium  that  may  be  simply  a  token, 
of  little  or  no  intrinsic  value,  as  the  wampum  of  the  North 
American  Indian  or  the  sea  shells  of  the  South  Sea 
Islanders.  But  even  these  gradually  give  way  to  metallic 
money  whose  qualities  of  divisibility,  durability,  uni- 
versality, high  exchange  value  and  relative  light  weight, 
etc.,  make  it  an  excellent  medium  of  exchange.  With  this 
development  the  act  of  making  business  transactions  is 
greatly  facilitated.  It  now  becomes  possible,  as  well  as 
convenient,  to  establish  permanent  business  where  transport 
facilities  permit  of  bringing  together  a  sufficiently  diversi- 
fied stock  of  goods.  The  fairs  which  were  the  most  promi- 
nent characteristic  of  business  in  the  preceding  period 
wane  and  become  gradually  of  less  and  less  importance, 
until  they  give  way  almost  entirely  to  permanent  estab- 
lishments operated  as  individual  proprietorships  or  part- 
nerships. 

However,  throughout  this  whole  stage  money  itself  is  not 
looked  upon  as  wealth,  but  merely  as  a  convenient  medium 
of  exchange.  Its  use,  to  be  sure,  gradually  increases, 
especially  with  the  merchants  who  employ  it  extensively  to 
facilitate  their  business  transactions,  but  who,  neverthe- 
less, derive  no  direct  profit  from  it.  Public  opinion  is 
not  ripe  for  this,  and  attempts  on  the  part  of  merchants  or 
other  possessors  of  money  to  thus  utilize  it,  for  example,  by 
levying  taxes  in  terms  of  money  instead  of  in  kind  or  by 


12    ECONOMIC    AND    LEGAL    FUNDAMENTALS 

lending  it  out  at  interest,  meets  with  strong  disapproval. 
This  reflection  of  the  public  sentiment  is  well  illustrated  by 
the  numerous  laws  and  bans  of  the  church  against  usury, 
so  common  in  Europe  during  the  early  middle  ages. 

2.  The  money  capital  stage.  —  In  the  preceding  stage 
we  have  seen  how  money  gradually  becomes  an  important 
element  of  the  business  transaction.  At  what  point,  then, 
does  it  begin  to  be  looked  upon  as  capital?  The  exten- 
sion of  the  concept  of  capital  simply  follows  the  natural 
channel  of  economic  progress.  As  the  merchants  and 
traders  were  the  first  to  employ  money  quite  generally  in 
their  business,  they  soon  found  it  convenient  to  value 
their  stock  of  goods,  to  keep  their  accounts  and  to  cal- 
culate their  profit  and  to  pay  their  taxes  in  terms  of  money. 
A  stock  of  goods  to  them  was  a  money  investment  from 
which  they  sought  to  derive  an  income.  Here  then,  is  the 
embryo  that  later  develops  into  the  concept  of  money  capi- 
tal. In  the  preceding  period  personal  labor  was  looked 
upon  as  the  only  source  of  income,  for  then  the  idea  of 
the  productivity  of  capital  did  not  exist,  merely  because  it 
was  not  calculable.  The  idea  of  income,  the  striving  to 
derive  a  return  from  capital  is  the  great  characteristic  of 
capitalistic  industrialism.  It  is  at  this  point,  also,  where 
the  distinction  between  the  capitalist  and  laborer  arises. 
The  laborer  works  only  by  request  or  order,  whereas  the 
capitalist  entrepreneur  produces  for  stock  or  for  the  mar- 
ket. Naturally  the  entrepreneur  assumes  an  entirely  dif- 
ferent element  of  risk  than  the  laborer,  for  he  risks  not  only 
the  capital  tied  up  in  his  wares,  but  eventually  also  that 
represented  by  his  business  plant  and  equipment.  Capital 
risk  is  a  characteristic  of  the  money  capital  stage  of  in- 
dustry that  distinguishes  this  from  the  preceding  stage. 
It  cannot  be  held,  however,  that  the  wage  worker  assumes 
no  risk;  for  he  does  assume  a  risk  which,  under  certain 
conditions,  may  be  greater  and  more  dangerous  than  that 


THE    CONCEPT    OF    CAPITAL  13 

of  the  capitalist,  namely,  the  risk  of  failure  to  secure  suffi- 
cient work  to  sustain  himself.  But  this  distinction  is  to  be 
noted  —  he  cannot  calculate  his  risk  in  terms  of  money. 
Money,  then,  becomes  capital  only  when  the  possessor 
thereof  can  derive  an  income  from  it  by  risking  it  in- 
directly in  the  form  of  wares,  plant,  equipment,  etc.,  valued 
in  terms  of  money,  or  directly  in  the  form  of  a  money  loan. 

The  above  definition  clearly  distinguishes  between  two 
periods  of  money  capital:  first,  when  it  is  used  as  the 
chief  measure  of  value  for  commercial  and  industrial  under- 
takings; and  second,  when  it  is  employed  directly  as  loan- 
able funds.  The  first  period  may  be  called  the  commercial 
capital  period.  It  is  in  this  stage,  then,  when  it  first  be- 
comes possible  to  establish  a  business  with  stock,  equip- 
ment, wares,  etc.,  procured  with  borrowed  funds.  This 
period  witnesses  the  development  of  great  commercial 
undertakings,  while  the  second  is  characterized  by  the  rise 
of  business  institutions  peculiarly  adapted  to  handle 
money  capital,  e.  g.,  banks,  and  at  a  somewhat  later  time 
exchanges.  It  is  out  of  these  two  roots  that  the  concept 
of  securities  capital  has  grown.  Out  of  commercial  capital 
arise  stocks,  the  chief  form  of  ownership  securities,  and 
out  of  loan  capital  bonds  or  credit  securities. 

It  is  of  course  self-evident  that  neither  money,  nor  securi- 
ties create  new  economic  capital.  The  lender  of  money 
to  a  business  undertaker  and  the  purchaser  of  bonds,  secures 
thereby  only  the  right  to  demand  a*  share  of  the  earnings 
which  the  debtor  seeks  to  procure  from  the  productive  use 
of  his  economic  (commodity)  capital  or  his  personal  ser- 
vices. But  from  the  standpoint  of  the  economist  these 
borrowed  funds  become  capital  only  when  they  are  risked 
by  investment  in  some  enterprise,  as  in  transforming  them 
into  commodity  capital.  It  is  merely  a  complex  process  of 
substitution,  whereby  capital  funds  are  made  fluid  and  be- 
come generally  available  to  those  entrepreneurs  who  pos- 


14     ECONOMIC    AND    LEGAL    FUNDAMENTALS 

sess  insufficient  quantities  in  their  own  right  properly  to 
conduct  the  enterprises  which  they  undertake. 

The  entrepreneurial  organization,  —  the  form  of  organi- 
zation under  which  business  is  conducted,  —  shows  in  this 
stage  great  development  and  change.  To  the  individual 
proprietorship  and  the  partnership  are  now  added  new 
forms.  Joint  undertakings,  or  "  joint  adventures  "  as  they 
are  also  called,  with  ownership  represented  by  divisible, 
transferable  shares;  joint  stock  companies  with  their  in- 
divisible shares,  and  the  corporation  make  their  appear- 
ance. 

This  development  coupled  with  the  economic  advance- 
ment brought  about  by  the  great  mechanical  inventions  of 
the  industrial  revolution  in  the  latter  part  of  the  eighteenth 
century  stimulate  a  rapid  growth  in  the  size  of  business 
units.  They  demanded  vast  sums  of  capital  which  could 
not  be  secured  without  the  use  of  securities  as  instrumen- 
talities of  organization. 

By  the  general  term  "  securities  "  we  mean  that  class  of 
commercial  paper  that  is  issued  in  large  numbers  of  units 
of  like  denomination  and  kind  for  a  relatively  long  term  of 
years,  that  are  freely  interchangeable  and  transferable, 
and  to  which  attaches  a  right  to  a  share  in  the  earnings 
of  the  business  and  a  claim  to  the  capital  which  they  repre- 
sent. They  are  of  two  types:  stocks  w^hich  represent  an 
ownership  interest  or  contributions  of  capital  to  remain 
permanently  in  the  business,  and  bonds  representing  a 
creditor's  interest  or  funds  loaned  to  the  business  but  which 
must  be  returned  to  the  holder  of  the  bond  at  a  definite 
time. 

As  long  as  it  was  impossible  to  give  to  real  or  money 
capital  the  security  form,  an  entrepreneur  who  had  insuffi- 
cient capital  in  his  own  name  could  round  out  his  require- 
ments only  by  personal  dealings  wdth  someone  who  had 
real  or  money  capital  to  lend.    The  institution  of  credit^  as 


THE    CONCEPT    OF    CAPITAL  15 

well  as  the  entrepreneurial  organization,  from  the  individual 
proprietor  to  the  most  ramified  type  of  partnership,  without 
the  concept  of  securities  capital,  must  rest  upon  a  personal 
relationship,  a  legal  joint  contract  between  the  parties  at 
interest.  But  how  different  the  joint  stock  company  and 
the  corporation!  Not  only  are  money  funds  made  avail- 
able through  fluidity,  but  even  the  real,  or  goods  capital,  of 
enterprises  becomes  fluid  in  so  far  as  ownership  is  con- 
cerned. The  possessor  of  a  small  quantity  of  ready  funds 
can,  by  utilizing  them  in  the  purchase  of  securities,  be- 
come a  participant  in  the  largest  industrial  or  commercial 
undertakings  of  the  day.  In  so  doing,  to  be  sure,  he  assumes 
the  risk  attendant  upon  an  entrepreneurial  relationship,  or 
as  a  creditor,  to  such  enterprises,  but  his  chances  of  obtain- 
ing a  relatively  large  profit  are  good,  perhaps  even  better 
than  he  might  obtain  by  turning  his  money  over  to  a  bank 
in  the  form  of  a  savings  deposit.  The  outstanding  effect  of 
widening  the  source  of  funds  for  business  undertakings 
through  the  issue  of  securities  has  increased  correspond- 
ingly the  number  of  those  whose  income  consists  only  of 
the  returns  from  their  security  investments;  in  other 
words,  who  enjoy  an  income  quite  independent  of  any 
labor  on  their  part.  During  the  stages  previously  discussed 
such  an  income  was  possible  only  to  a  comparatively 
limited  degree,  as  when  a  land  owner  let  his  land  out  on  a 
long  time  lease  to  others.  For  even  if  he  had  large  sums 
of  money  to  lend  out,  he  could  have  done  so  safely  only  by 
diligently  investigating  the  risk  entailed  by  each  individual 
loan,  basing  his  decision  largely  upon  the  personal  char- 
acter and  estimated  business  ability  of  the  borrower.  One 
is  quite  safe  in  saying,  that  it  would  have  been  impossible 
to  bring  together  the  vast  quantities  of  capital  employed  by 
our  great  modern  industrial  and  commercial  establishments 
without  first  having  evolved  a  plan  of  making  the  posses- 
sion of  real  capital,  privately  owned,  an  impersonal  matter, 


16     ECONOMIC    AND    LEGAL    FUNDAMENTALS 

This  the  use  of  securities  as  instrumentalities  of  organiza- 
tion has  succeeded  in  doing  without  breaking  down  the  idea 
of  private  property. 

3.  The  Securities  Capital  Stage.  —  However,  the  idea  of 
the  use  of  securities  as  business  capital  has  not  attained  its 
complete  development  with  the  general  use  and  acceptance 
of  securities  as  instruments  of  organization.  The  develop- 
ment must  go  still  further  until  the  entire  business  capital 
of  an  enterprise  may  consist  essentially  of  the  securities 
issued  by  other  business  organizations  to  the  practical  ex- 
clusion of  the  other  forms  of  capital,  so  that  a  new  business 
may  be  formed  to  issue  securities  to  represent  a  capital  that 
consists  entirely  of  securities.  This  concept  now  prevails  in 
all  of  the  more  advanced  industrial  and  commercial  coun- 
tries of  the  world. 

To  that  class  of  business  organization  that  issues  se- 
curities to  represent  a  capital  consisting  in  greater  part  of 
securities  of  other  concerns,  Professor  Robert  Liefmann  has 
aptly  given  the  name  of  securities-substitution  companies.^ 
They  embody  the  principle  of  the  holding  corporation  and 
include  such  types  as  the  control  company,  the  investment 
trust,  the  finance  company  and  the  assumption  company. 
While  they  create  new  business  enterprises,  they  do  not 
add  to  the  producing  equipment  of  the  country  in  which 
they  exist.  They  are  essentially  organizations  that  with- 
draw securities  from  the  public  to  hold  them  in  reserve  in 
vaults  and  banks  in  order  to  accomplish  the  purpose  for 
which  they  were  organized;  whether  this  be  to  continue 
existing  organizations  under  a  single  control,  to  average  the 
profits  accruing  to  a  large  variety  of  securities,  to  finance 
new  securities-issuing  companies  or  to  relieve  finance 
companies  from  an  overburden  of  securities.  They  arc  the 
highest,  as  well  as  the  most  flexible  and  elastic  type  of 
ownership  organization  that  has,  as  yet,  been  developed. 

^  Robert  Liefmann,  Beteiligungs  und  Finanzierungsgesellschaften, 
Jena,  1913. 


THE    CONCEPT    OF    CAPITAL  17 

Influence  of  Large  Scale  Production  and  Competition 
on  Organization.  —  While  the  development  of  the  concept 
of  business  capital  has  called  into  being  certain  new  forms 
of  ownership  organization,  large  scale  production  and 
competition  have  given  an  impetus  to  the  revival  of  old 
and  time-worn  institutions  to  bring  about  closer  co-opera- 
tion between  business  enterprises  within  the  same  industry. 
The  productive  capacity  of  established  enterprises  is  keyed 
up  to  meet  a  maximum  demand  for  goods.  But  this  de- 
mand, influenced  by  many  economic  factors,  is  constantly 
fluctuating  —  now  increasing  rapidly,  now  falling  off.  The 
modern  business  establishment  must  operate  at  somewhere 
near  maximum  capacity  to  be  profitable,  and  consequently 
the  effect  of  fluctuations  in  the  demand  for  its  products 
tends  to  bring  about  a  state  of  "  cut-throat "  competition, 
that  must  naturall}'  result  in  a  battle  for  the  survival  of  the 
fittest.    The  result  is  combination. 

Combination  in  industry  may  be  for  the  purpose  of 
assuring  the  combining  units  a  share  of  the  market  for 
their  products,  for  the  purpose  of  assuring  themselves 
supplies  of  raw  materials  to  enable  them  to  produce  at 
lower  costs,  or  to  obtain  a  monopolistic  command  over  the 
industry.  These  forces,  as  will  be  explained  more  fully  in 
later  chapters,  give  rise  to  new  forms  of  organization, 
which,  however,  largely  make  use  of  the  prevailing  forms 
of  ownership  organization,  supplemented  by  the  legal  insti- 
tution of  contract.  Thus,  we  have,  today,  commercial  asso- 
ciations, chambers  of  commerce,  factors,  agreements,  pools 
and  kartells,  and  monopolies  and  trusts. 

While  it  is  not  the  purpose  of  this  work  to  go  into  an  ex- 
haustive study  of  the  problems  incident  to  combinations 
and  trusts,  the  work  would  be  lacking  in  completeness,  were 
we  to  omit  a  description  of  these  most  important  forms  of 
organization.  But  to  do  more  than  this  would  necessitate 
an  expansion  of  the  work  beyond  the  limits  indicated  by 
its  title. 


CHAPTER   II 

THE  LEGAL  FOUNDATION   OF   ORGANIZATION 
IN   BUSINESS 

The  economic  principles  laid  down  in  the  preceding 
chapter  are  of  general  application  in  all  modern  industrial 
countries,  and  through  these  they  have  influenced  the  types 
of  ownership  organizations  that  are  to  be  found  in  less  de- 
veloped lands.  But,  at  best,  these  principles  furnish  ml 
only  the  skeleton  of  the  organization  without  the  technical 
arrangements  which  are  so  necessary  to  give  it  life.  These 
technical  arrangements  are  prescribed  and  defined  by  com- 
mon and  statute  law  in  each  country.  The  result  is,  that, 
while  the  corresponding  forms  of  organization  are  recog- 
nizable from  country  to  country,  they  nevertheless,  exhibit 
considerable  variation.  The  legal  foundation  upon  which 
they  must  be  erected  in  a  given  country  may  differ  radically 
from  that  of  another.  Thus  a  thorough  knowledge  of  the 
commercial  or  business  law  of  each  nation  would  be  neces- 
sary for  a  complete  understanding  of  its  ownership  organi- 
zations. However,  rather  than  to  attempt  to  describe  the 
vast  multitude  of  technical  legal  requirements  pertaining  to 
this  subject  that  are  to  be  found  in  the  larger  industrial 
countries,  w^e  shall  confine  ourselves  for  the  most  part  to 
a  consideration  of  those  that  prevail  within  the  United 
States  and  refer  only  incidentally  to  variations  to  be  found 
in  other  countries. 

The  Legal  Foundation.  —  The  system  of  jurisprudence 
of  the  United  States  is  of  English  origin.  It  is  a  bifurcated 
system  made  up  of  the  common  law  and  the  statute  law. 
The  common  law  consists  chiefly  of  an  accumulation,  over 

18 


THE    LEGAL    FOUNDATION  19 

a  period  of  many  centuries,  of  customs  as  interpreted  by 
court  decisions  and  consequently  is  based  almost  entirely 
upon  precedent.  Statute  law  comprises  all  acts  of  the  state 
and  federal  legislative  bodies  in  so  far  as  they  are  within 
the  constitutional  limitations  set  by  the  people.  Statutes 
modify  the  common  law  principles  wherever  the  two  do 
not  agree.  Hence,  in  any  application  of  law,  the  federal 
constitution  is  held  to  apply  first,  the  state  constitutions 
second,  the  statutes  third  and  the  common  law  last,  each, 
however,  within  its   own  sphere  of  jurisdiction.^ 

In  the  United  States,  the  influence  that  government  has 
on  business  is  of  a  two-fold  nature;  on  the  one  hand,  that 
exercised  by  the  state  governments,  and  on  the  other,  that 
exercised  by  the  federal  government.  The  effect  of  the 
tenth  amendment  to  the  constitution  of  the  United  States 
is  to  make  the  federal  government  one  of  delegated  powers 
only,  while  all  residual  powers  remain  vested  in  the  indi- 
vidual states.  It  follows,  therefore,  that  any  state  may 
freely  pass  any  legislation  affecting  business,  except  in  such 
matters  as  are  specifically  reserved  to  the  United  States  or 
denied  the  several  states  by  the  federal  constitution,  or  are 
found  to  be  contrary  to  the  provisions  of  the  constitutions 
of  the  several  states. 

Among  the  more  important  restrictions  on  the  power  of 
the  states  to  legislate  upon  business  or  to  interfere  with  it, 
are  prohibitions  against  laws  impairing  the  obligation  of 
contracts,  laws  seeking  to  deny  to  the  citizens  of  each  state 
the  privileges  and  immunities  of  the  citizens  of  the  several 
states,  and  laws  seeking  to  levy  duties  on  imports  and  ex- 
ports of  any  other  state,  which  naturally  would  be  legisla- 
tion on  interstate  and  foreign  commerce,  control  over  which 
is  vested  in  the  federal  Congress. 

The  powers  delegated  to  the  United  States  Government 

1  It  should  be  noted  that  the  State  of  Louisiana  does  not  follow 
the  EngHsh  law  but  has  adopted  in  a  modified  form  the  Napoleonic 
Code  of  France. 


20     ECONOMIC    AND    LEGAL    FUNDAMENTALS 

that  affect  business  more  or  less  directly  are  contained  in 
Section  8  of  Article  I  of  the  Constitution.  They  include 
the  following: 

1.  To  regulate  commerce  with  foreign  nations  and  among 
the  several  states 

2.  To  establish  uniform  bankruptcy  laws  throughout  the 
United  States 

3.  To  coin  money  and  to  provide  a  system  of  currency 

4.  To  fix  the  standard  of  weights  and  measures 

5.  To  establish  post  offices  and  post  roads 

6.  To  grant  patents,  copyrights  and  trade-marks 

7.  To  levy  taxes,  duties,  imposts  and  excises 

8.  Under  the  sixteenth  amendment  to  the  constitution,  to 
levy  and  collect  taxes  on  incomes. 

Section  9  of  Article  I  of  the  Constitution  places  certain 
restrictions  upon  the  power  of  Congress  to  legislate  on  mat- 
ters affecting  business.  It  prohibits  Congress  from  levying 
export  duties  on  articles  exported  from  any  state,  from 
favoring  the  ports  of  one  state  as  against  the  ports  of 
another  through  any  regulation  of  commerce  or  revenue 
and  from  levying  duties  on  vessels  engaged  in  interstate 
trade. 

Federal  Laws  and  Entrepreneurial  Organization.  —  It 
is,  therefore,  apparent  that  privately  conducted  business  is 
more  intimately  concerned  in  the  regulatory  laws  and  acts 
of  the  several  states  than  in  those  of  the  federal  govern- 
ment. But  the  growth  in  size  of  the  average  business  estab- 
lishment, the  extension  of  markets  and  the  efficiency  of 
transportation  systems  has  made  American  big  business 
characteristically  interstate,  and  because  of  this,  the  weight 
of  federal  statutes  regulating  interstate  commerce  is 
exerting  an  ever-increasing  pressure  on  the  business 
world,  in  this  way  bringing  the  business  man  into 
more    intimate  relationship    to    the    federal    government. 


THE    LEGAL    FOUNDATION  21 

Moreover,  the  continuation  of  the  process  of  integra- 
tion and  concentration  of  commerce  and  industry  through 
the  combination  and  absorption  of  business  units  by 
others,  resulting  in  such  gigantic  business  establish- 
ments as  the  United  States  Steel  Corporation,  the  Allied 
Packers,  and  the  United  Retail  Stores  and  hundreds 
of  others,  will,  in  the  near  future,  make  it  imperative  upon 
the  federal  government  to  extend  its  legal  control,  not  only 
over  their  methods  of  competition,  but  also  over  their 
ownership  relations.  This  does  not  mean  that  the  federal 
government  has  kept  its  hands  off  business;  for  it  has,  on 
the  contrary,  passed  many  laws  against  combinations  in 
restraint  of  trade,  regulating  railways,  etc.,  but  in  the 
main,  its  legislation  has  been  confined  to  regulation  of 
interstate  commerce,  and  to  attempts  to  preserve  a  state 
of  free  and  fair  competition.  These  acts,  in  so  far  as  they 
affect  boisiness  organizations,  apply  largely  to  the  higher 
types.  An  explanation  of  them  is,  for  this  reason,  de- 
ferred to  a  following  chapter. 

State  Laws  and  Entrepreneurial  Organizations.  —  Under 
the  English  common  law  nearly  all  of  the  types  of  entre- 
preneurial or  ownership  organization  that  now  are  in  gen- 
eral use  might  be  formed,  though,  in  some  cases,  with  con- 
siderably restricted  powers.  Such  entrepreneurs  as  found 
it  desirable  to  secure  advantages  in  the  matter  of  business 
organizations  which  the  common  law  did  not  afford,  found 
themselves  obliged  to  appeal  to  some  state  legislature  to 
secure  a  special  act  empowering  them  to  enjoy,  and  to  use, 
the  desired  privileges.  This  condition  resulted  in  fraud, 
bribery  and  many  other  abuses  carried  to  an  unheard  of 
extent.  Finally,  the  people  of  the  several  states,  tiring  of 
these  practices,  prevailed  upon  their  legislatures  to  adopt 
general  laws  that  would  apply  to  all  alike.  These  general 
statutes  apply,  in  general,  to  all  types  of  organizations  in 
which  the  risk  of  loss  of  the  entrepreneur  is  limited  to  a 


22     ECONOMIC    AND    LEGAL    FUNDAMENTALS 

more  or  less  predetermined  amount,  as  in  certain  types  of 
partnerships  and  in  the  corporation. 

Domestic  and  Foreign  Organizations.  —  It  is  through 
these  general  statues  that  the  peculiar  arrangement  of  our 
government  that  vests  the  states  with  residual  powers 
makes  itself  felt.  Any  one  of  the  forty-eight  states  of  the 
union  may  adopt  legislation  creating  new  and  untried  types 
of  entrepreneurial  organization,  vesting  them  with  special 
powers  and  privileges  which,  again,  might  be  denied  them 
in  adjacent  states.  Such  organizations  are  accordingly 
spoken  of  as  being  domestic  in  the  state  under  whose  laws 
they  were  created,  and  as  being  foreign  in  all  other  states. 
Since  the  legal  jurisdiction  of  any  state  does  not  extend 
beyond  its  own  boundaries,  it  follows  that  all  of  the  states 
have,  in  general,  the  power  to  limit  or  restrict  as  they 
please  the  activities  of  foreign  business  organizations  of  the 
type  in  question.  They  may  even  exclude  them  entirely 
from  doing  business  within  their  jurisdiction,  provided,  of 
course,  that  they  treat  alike  all  foreign  organizations,  of  a 
given  class,  and  do  not  interfere  with  interstate  business. 

Greater  Freedom  of  Common  Law  Organizations. — 
Generally  speaking,  the  rights,  powers,  privileges  and  im- 
munities of  business  organizations  based  upon  common  law 
are  the  same  in  all  of  the  states,  except  in  those  cases  where 
common  law  principles  have  been  modified  by  statute.  As  a 
result  of  this  general  rule,  it  follows  that  business  organiza- 
tions based  upon  common  law,  as  is  quite  generally  the 
case  with  the  individual  proprietorship  and  the  pure  part- 
nership, enjoy  a  relatively  greater  freedom  of  action  than 
do  those  organizations  that  are  created  by  statute. 

Comparative  Qualities  of  Entrepreneurial  Organiza- 
tions. —  To  enable  one  clearly  to  understand  the  legal  dis- 
tinctions that  differentiate  the  types  of  entrepreneurial  or- 
ganizations from  one  another,  some  basis  of  comparison 
must  be  employed.    In  seeking  such  a  basis  of  comparison, 


THE    LEGAL    FOUNDATION  23 

we  find  that  all  entrepreneurial  organizations  have  some 
qualities  in  common,  but  that  they  possess  these  qualities 
in  varying  degree  of  intensity.  A  brief  discussion  of  each 
of  these  comparative  qualities  will  make  the  distinctions 
clear. 

(a)  Method  of  formation.  —  Entrepreneurial  organiza- 
tions may  be  established  either  by  the  simple  volition  of 
a  single  individual,  by  contract  between  two  or  more  in- 
dividuals, or  by  state  authority.  An  individual  who  has  an 
idea,  the  necessary  capital  and  the  will  to  become  an  entre- 
preneur needs  only  to  combine  these,  and  to  set  up  his 
establishment  at  his  own  pleasure.  But,  if  he  feels  that 
the  undertaking  is  too  big  for  his  own  resources,  and  he 
desires  to  have  others  go  into  the  venture  with  him  as  part- 
ners, the  necessity  for  an  agreement  among  them,  as  to 
the  share  of  each  in  the  business,  becomes  imperative.  Such 
an  agreement  in  the  eyes  of  the  law  would  be  a  contract 
which  maj^  be  altered  only  by  subsequent  agreement  of  the 
parties  thereto.  If  his  proposed  undertaking  will  require 
the  combined  resources  of  many  individuals,  he  may  find 
the  contractual  relationship  among  them  impractical, 
which  circumstance  may  lead  to  the  adoption  of  an  organi- 
zation such  as  would  obviate  the  need  of  such  a  binding 
contract  as  the  partnership  agreement.  He  would,  in  such 
a  case,  most  likely  adopt  the  corporate  form  of  organiza- 
tion and  issue  securities.  However,  to  do  this,  he  must 
secure  the  proper  authority  from  the  state  and  proceed  ac- 
cording to  state  law. 

(6)  Liability  of  the  entrepreneur.  —  In  business  par- 
lance, the  term  liability  refers  to  the  financial  obligation 
assumed  by  the  entrepreneur.  It  is  held  to  be  unlimited 
when  the  creditors  of  the  business  have  the  lawful  right, 
through  proper  court  procedure,  in  case  of  the  insolvency 
of  the  entrepreneur,  to  apply  all  -  of  his  real  and  personal 

'  There   are  always   certain  exemptions  under   federal   and   state 
laws. 


24>     ECONOMIC    AND    LEGAL    FUNDAMENTALS 

property  toward  the  satisfaction  of  their  claims  against 
him  or  his  business.  In  former  times,  when  an  entrepreneur 
went  into  bankruptcy,  all  of  his  property  could  be  seized 
by  his  creditors,  and  he,  himself,  should  his  property 
be  insuflicent  to  pay  his  creditors  in  full,  could  be 
thrown  into  prison  until  all  of  his  debts  had  been 
paid.  Under  modern  practice,  however,  the  entre- 
preneur is  discharged  from  any  further  obligation  on 
surrendering  all  of  his  property,  unless  there  is  evi- 
dence of  deceit  or  fraud.  The  modern  theory  thus  places 
upon  the  lender,  as  well  as  upon  the  borrower,  the  risk 
of  credit  transactions.  The  curtailment  of  the  power  of 
the  creditor  over  the  debtor  has  been  carried  still  further  by 
laws  providing  for  limited  liability  of  entrepreneurs  under 
certain  types  of  organization,  such  as  the  corporation  and 
the  limited  partnership,  whereby  the  creditor  may  look 
ordinarily  only  to  assets  of  the  business,  as  distinct  from 
the  other  property  of  the  entrepreneur,  for  the  satisfaction 
of  debts.  Limited  liability  is  only  assuredly  procurable 
through  authorization  by  the  state,  which  then  protects  the 
creditor,  in  part,  by  giving  public  notice  of  any  grant  of 
limited  liability. 

(c)  Ease  with  which  the  required  capital  may  be  pro- 
cured. —  Statistics  indicating  the  rapid  and  steady  increase 
of  the  capital  requirements  of  the  average  manufacturing 
establishment,  showed,  in  1914,  that  this  had  reached  the 
sum  of  $76,952.  This  amount  is  considerably  in  excess  of 
what  the  average  business  man  has  at  his  command,  either 
in  funds  that  he  himself  owns,  or  that  he  may  borrow. 
Moreover,  even  if  an  entrepreneur  were  fortunate  enough 
to  launch  an  average  manufacturing  establishment  with- 
out outside  assistance,  it  is  yet  questionable  whether  he 
would  find  it  advisable  to  adopt  a  form  of  organization 
that  would  involve  him  in  unlimited  liability,  when  it  is 
relatively  easy  for  him  to  limit  it.    The  question  of  busi- 


THE    LEGAL    FOUNDATION  25 

ness  expansion,  also,  is  important  in  this  connection.  If 
all  owned  and  borrowed  funds  that  can  be  procured  under 
the  unlimited  liability  types  of  organization  are  already  in 
use,  it  will  be  very  difficult  to  secure  additional  funds  for 
the  purpose  of  expansion.  For  an  individual  is  not  likely 
to  assume  a  share  of  the  entrepreneurial  function  in  such  an 
enterprise,  when  by  so  doing,  he  assumes,  irrespective  of  his 
associates  in  the  business,  the  full  legal  responsibility  not 
only  for  all  the  standing  debts,  but  also  for  the  debts  that 
may  m  future  be  incurred.  For  this  reason,  the  number  of 
individuals  who  can  be  taken  into  such  an  organization  as 
entrepreneurs  is  relatively  small,  which  fact  in  turn  limits 
the  supply  of  funds  that  may  be  drawn  on.  But  if,  on  the 
other  hand,  it  is  a  type  of  organization  wdiich  limits  the 
legal  liability  of  the  entrepreneur  to  that  amount  which  he 
puts  into  the  business,  the  chances  of  securing  additional 
capital  are  thereby  made  much  greater.  Indeed,  the  limited 
liability  form  of  securities-issuing  organizations  have  on 
tap  practically  an  inexhaustible  supply  of  loanable  funds 
to  draw  upon  through  the  sale  of  securities,  while  the  un- 
limited liability,  and  non-securities-issuing  forms  must 
very  largely  be  content  with  such  funds  as  the  private 
fortunes  of  a  few  intimately  acquainted  persons  might 
provide. 

(d)  Durabilitij  and  Stability.  —  The  quality  of  dura- 
bility and  stability  is  a  criterion  by  which  the  possible  span 
of  life  of  an  entrepreneurial  organization  may  be  judged. 
It  is  primarily  concerned  with  those  acts  or  conditions  that, 
in  the  eyes  of  the  law,  will,  ipso  facto,  break  up  the  business 
unit.  A  little  reflection  enables  us  readily  to  classify  them 
into  two  groups;  namely,  those  that  are  voluntary,  and 
those  that  are  involuntary.  In  the  first  instance  the  disso- 
lution of  the  organization  is  based  upon  the  personal  desire 
of  the  entrepreneur  to  dissociate  himself  from  his  business, 
while  in  the  second,  it  results  usually  through  the  operation 
of  law,  regardless  of  the  desire  of  the  entrepreneur. 


26     ECONOMIC    AND    LEGAL    FUNDAMENTALS 

The  ease  with  which  the  voluntary  decision  of  an  indi- 
vidual to  discontinue  his  entrepreneurial  relationship  to  a 
given  business  enterprise  can  be  carried  into  effect,  depends 
upon  the  legal  nature  of  the  act  creating  the  organization. 
If  it  has  been  created  by  simple  voluntary  act  on  the  part 
of  a  single  individual,  it  may  be  dissolved  in  the  same  way, 
for  example,  by  the  sale  or  discontinuance  of  the  business 
by  the  individual  entrepreneur.  Where  the  organization 
has  been  established  by  a  contractual  relationship  between 
several  individuals,  this  freedom,  on  the  part  of  the  entre- 
preneur, to  withdraw  at  will  is  much  limited  and  restrained 
by  legal  bonds.  The  withdrawal  of  any  one  of  the  entre- 
preneurs in  such  cases  constitutes  a  breach  of  contract,  un- 
less withdrawal  is  provided  for  in  the  contract  agreement, 
or  acquiesced  in  by  the  other  contracting  parties.  In 
either  case,  however,  such  an  act  is  held  at  law  to  be  an 
abrogation  of  the  contract;  the  result  of  which  is  to  ex- 
tinguish the  organization  that  the  contract  brought  into 
being. 

In  the  case  of  those  organizations  that  employ  the  se- 
curity form  of  capital,  voluntary  dissolution  cannot  be 
brought  about  by  the  withdrawal  of  any  one  of  the  entre- 
preneurs interested ;  for  the  relationship  of  the  entrepreneur 
to  such  a  business  organization  is  purely  impersonal.  The 
business  continues  to  exist  intact,  because  the  entrepreneur 
who  retires  cannot  withdraw  capital  from  it,  but  merely 
transfers  his  interest  in  it  by  divesting  himself  of  title  to 
its  securities.  To  accomplish  the  voluntary  dissolution  of 
this  type  of  organization  requires  a  full  compliance  with 
the  provisions  of  the  grant  of  authority  given  by  the  state 
in  the  first  instance,  by  virtue  of  which  the  organization 
was  established.  However  difficult  of  accomplishment  this 
may  be,  it  nevertheless  still  leaves  to  the  will  and  desire 
of  the  individual,  the  matter  of  the  continuance  or  discon- 
tinuance of  his  entrepreneurial  relationship  to  the  business. 


THE    LEGAL    FOUNDATION  27 

Voluntary  dissolution  of  business  organizations  is,  on  the 
whole,  not  difficult  to  carry  into  effect.  Under  the  indi- 
vidual proprietorship,  no  fixed  procedure  whatever  need  be 
followed;  under  the  personal  contract  forms,  a  simple  con- 
tract similar  to  that  creating  the  organization  may  be  em- 
ployed, while  under  the  securities-issuing  types  of  organi- 
zation, the  procedure  to  be  followed  is  clearly  defined  and 
prescribed  by  law. 

Involuntary  dissolution  of  the  entrepreneurial  organiza- 
tion may  arise  from  three  general  causes,  i.  e.,  (1)  from 
the  death  of  the  entrepreneur,  (2)  from  operation  of  law 
and  (3)  from  social  revolution.  Dissolution  by  death  of  the 
entrepreneur  takes  place  only  in  the  lower  forms  of  organi- 
zations such  as  the  individual  proprietorship  and  the  part- 
nership, but  can  hardly  be  effected  through  that  cause  in 
the  case  of  the  corporation.  For  the  latter  type  of  organiza- 
tion is  a  child  of  the  law,  created  as  an  entity  in  itself,  with 
ordinarily  a  fixed,  predetermined  period  of  life.  The  ex- 
istence of  certain  conditions  within  the  business,  as  for  ex- 
ample, insolvency,  and  also  the  commission  of  certain  acts 
by  the  entrepreneur,  that  are  either  fraudulent  in  nature, 
in  direct  violation  of  law,  or  that  impair  the  solvency  of  the 
business,  will,  by  operation  of  law,  force  the  organization 
into  dissolution.  Since,  in  the  pure  partnership,  each  part- 
ner has  unlimited  liability,  it  follows  that  the  insolvency 
of  any  partner  impairs  the  solvency  of  the  business,  and 
causes  dissolution.  In  so  far  as  social  revolution  is  a  force 
making  for  the  dissolution  of  entrepreneurial  organizations, 
it  goes  almost  without  saying,  that  any  social  upheaval  that 
would  result  in  the  establishment  of  a  different  industrial 
system  than  that  now  in  effect,  would  undoubtedly  make 
an  end  of  some  of  the  present  forms  of  business  organi- 
zation. 

Summarizing,  then,  the  various  aspects  of  the  quality  of 
durability   and  stability,  we  find  on  the  one  hand,  that 


28     ECONOMIC    AND    LEGAL    FUNDAMENTALS 

voluntary  dissolution  becomes  relatively  more  difficult  as 
the  complexity  of  the  organization  increases,  being  easiest 
to  accomplish  in  the  case  of  the  individual  proprietorship 
and  most  difficult  in  the  case  of  the  corporation;  and,  on  the 
other  hand,  that  involuntarily  dissolution  may  arise  most 
easily  where  the  organization  is  based  upon  a  personal  con- 
tractual relationship,  and  is  perhaps  less  likely  to  take 
place  in  those  organizations  that  enjoy  a  definite  period  of 
life  under  grant  of  the  state. 

(e)  Ease  of  direction.  —  Under  our  prevailing  industrial 
system,  the  activities  of  any  business  unit  must  be  directed 
and  administered  primarily  with  the  aim  and  purpose  in 
view  of  returning  a  profit  to  the  entrepreneur.  This  function 
presents  a  host  of  problems  for  whose  solution  the  respon- 
sibility ultimately  rests  upon  the  entrepreneur  himself;  for 
he  is,  as  it  were,  the  court  of  last  appeal  in  all  matters 
affecting  his  business.  We  find  him  thus,  either  directly 
or  indirectly,  confronted  by  the  financial  policy,  the  ques- 
tion of  expansion  or  contraction  of  the  business,  the  neces- 
sity of  adopting  a  suitable  form  of  administrative  organi- 
zation, the  selection  and  institution  of  a  policy  to  govern 
the  industrial  relations  between  the  management  and  its 
employees,  the  technical  problems  of  production,  buying 
and  selling  methods,  and  a  great  many  others  equally  as 
vexatious  and  difficult.  The  degree  of  success  or  failure, 
with  which  these  problems  are  met  and  solved  will  serve 
also  as  a  scale  by  which  to  measure  the  efficiency  of  the 
directive  force  behind  the  enterprise. 

Directness  of  control.  —  The  legal  responsibility  for  the 
direction  of  the  business  rests  upon  the  entrepreneur.  This 
circumstance  leads  easily  to  the  argument  that  a  direct 
control  on  the  part  of  the  entrepreneur  is  the  most  desirable. 
But  under  the  several  distinct  forms  of  organization 
recognized  by  law,  this  direct  contact  cannot  always  be 
maintained.    In  the  individual  proprietorship  and  the  part- 


THE    LEGAL    FOUNDATION  29 

nership  forms,  the  full  responsibility  for  the  direction  and 
management  of  the  business  is  usually  assumed  by  the 
entrepreneur.  This  is  more  or  less  inherent  in  these  forms; 
although  in  the  latter  type,  through  contractual  agreement, 
one  or  more  of  the  partners  may  limit  their  right  of  direc- 
tion to  the  extent  of  actually  withdrawing  from  any  active 
participation  in  the  affairs  of  the  business,  thus  becoming, 
as  it  were,  "  silent  partners."  Moreover,  what  in  the  lower 
forms  of  organization,  is  a  conscious,  voluntary  limita- 
tion of  the  power  of  direction  on  the  part  of  the  individual 
entrepreneur,  becomes,  in  the  more  complex  forms,  an  un- 
avoidable requirement  of  the  law.  Thus,  in  the  corpora- 
tion, we  find  the  entrepreneurs,  who  are  the  stockholders, 
directing  the  affairs  of  their  business,  with  but  few  excep- 
tions, through  the  medium  of  a  board  of  directors  chosen 
by  them  for  that  purpose.  Such  an  arrangement  can  have 
but  one  result.  It  leads  inevitably  to  lack  of  interest  on 
the  part  of  the  entrepreneur  in  his  business.  But,  where 
the  number  of  entrepreneurs  engaged  in  a  single  business  is 
very  large,  it  would  seem  to  be  almost  impossible  to  direct 
the  undertaking  without  introducing  some  such  directive 
body  into  the  organization. 

Secrecy.  —  However,  the  relative  efficiency  of  the  direc- 
tive machinery  of  the  several  types  of  entrepreneurial  or- 
ganization is  not  to  be  measured  solely  by  directness  of 
control.  There  are  other  factors  that  also  must  be  con- 
sidered. Thus,  secrecy,  where  it  is  essential  to  the  business, 
is  more  easily  manitained  if  there  is  but  a  single  entre- 
preneur, or  at  most,  if  the  number  is  small.  The  chance 
of  disclosure  of  secret  processes  naturally  tends  to  increase 
proportionately  with  the  number  of  persons  entrusted  with 
their  safekeeping.  But  even  very  large  organizations  have 
been  known  to  keep  secret  important  formulae  and  proc- 
esses in  the  face  of  concerted  efforts  on  the  part  of  com- 
petitors to  discover  them.     This  feature  has  been  one  of 


30     ECONOMIC    AND    LEGAL    FUNDAMENTALS 

the  marked  characteristics  of  the  German  chemical  and 
dye-stuff  industries.  Nevertheless,  the  simpler  types  of 
organization  seem  to  offer  some  little  advantage  to  the 
entrepreneur  in  this  respect. 

Centralization.  —  Another  aspect  of  the  question  of  effi- 
ciency of  the  organization  for  purposes  of  direction,  is  pre- 
sented by  consideration  of  the  quickness  with  which  action 
may  be  taken.  Here  again,  the  advantage  lies  with  the 
simpler  forms,  due  to  the  possibility  of  greater  concentra- 
tion of  authority  under  them.  The  position  of  the  entre- 
preneurs in  the  several  types  of  organization  in  this  par- 
ticular may  well  be  compared  with  the  absolute  monarchy, 
the  pure  democracy  with  full  power  to  act  vested  in  each 
member,  and  the  representative  democracy  which  may  act 
only  through  its  duly  elected  representatives.  The  indi- 
vidual entrepreneur,  as  the  absolute  monarch,  may  act 
while  the  others  are  considering  the  matter.  The  partner- 
ship like  the  pure  democracy,  would  find  much  difficulty  in 
adopting  a  plan  of  procedure  if  the  constituency  is  very 
large.  The  entrepreneurs  of  the  corporation,  like  the  citi- 
zens of  the  representative  democracy,  have  given  up  some 
of  their  directive  powers  for  the  sake  of  securing  prompt- 
ness of  action. 

Specialization.  —  Promptness  of  action,  however,  is  not 
secured  without  some  sacrifice.  Nearly  all  of  the  problems 
of  direction  that  confront  the  entrepreneur  require  that  the 
one  entrusted  M^th  their  solution  and  direction  have  some 
special  knowledge,  or  skill,  in  each  special  field.  In  case 
the  business  is  a  large  one,  administrators  well  versed  in 
the  principles  of  business  finance,  in  marketing  methods,  in 
the  technique  of  production  and  in  the  legal  aspects  of  the 
business,  are  essential.  What  could  be  more  desirable  than 
to  attach  such  experts  to  the  business  by  means  of  the 
entrepreneurial  bond,  thus  giving  them  a  keener  personal, 
as  well  as  financial,  interest  by  making  them  part  owners 


THE    LEGAL    FOUNDATION  31 

of  the  business?  This,  then,  is  a  question  of  hired  as 
against  associated  assistants.  In  the  case  of  the  individual 
proprietorship,  it  is  obviously  impossible  to  have  associated 
assistants.  Here,  centralization  of  direction  is  secured  at 
the  sacrifice  of  specialization.  The  pure  partnership  permits 
of  some  specialization  through  association  of  partners,  but 
exhibits  a  great  lack  of  centralization.  Only  in  the  higher 
forms  of  organizations  does  a  balance  between  the  two 
exist.  They  afford  the  opportunity  of  giving  the  specialists 
the  amount  of  freedom  of  action  they  would  seem  to  re- 
quire, while  at  the  same  time  the  possibility  of  over-special- 
ization may  in  part  be  guarded  against  by  giving  the 
specialists  a  proprietary  interest  in  the  business. 

The  various  aspects  which  the  ease  of  direction  of  the 
several  types  of  business  organization  presents,  are  such  as 
the  careful  student  of  the  problem  of  organization  cannot 
well  neglect  to  take  into  consideration. 

(/)  Onerous  obligations.  —  No  type  of  business  organi- 
zation leaves  the  entrepreneurs  entirely  free  from  certain 
onerous  obligations.  Some  of  the  more  important  among 
obligations  of  this  nature,  are  taxes  and  reports  to  the 
state  and  federal  governments  and  to  those  who  have  a 
proprietary  interest  in  the  business.  The  simpler  forms 
of  organization  are  relatively  free  from  these;  but  the 
higher  forms,  and  more  particularly  the  corporation,  are 
heavily  burdened  with  them.  The  necessity  of  requiring 
complete  information  concerning  business  establishments 
operating  under  limited  liability  to  be  recorded  and 
filed  where  it  will  be  available  to  those  who  have 
business  relations  wdth  such  concerns,  is  only  too  ap- 
parent. Their  creditors  must  be  advised  of  the  limited 
liability  of  those  with  whom  they  do  business.  As 
the  state  takes  upon  itself  the  responsibility  for  grant- 
ing limited  liability  to  entrepreneurs,  so  also,  doe?  it 
assume  the  responsibility  for  keeping  on  hand  detailed  in- 


32     ECONOMIC    AND    LEGAL    FUNDAMENTALS 

formation  relative  to  such  grants.  These  records  are  open 
to  inspection  by  the  public. 

Because  of  the  peculiar  arrangement  of  our  political  sys- 
tem, any  state  may  authorize  a  limited  liability  business 
organization  which,  however,  may  do  business  in  other 
states  only  on  sufferance  of  those  states.  Each  state  has  the 
right  and  power  of  defining  under  what  conditions  the 
limited  liability  organizations  of  other  states  shall  be  per- 
mitted to  do  business  within  its  boundaries;  and  in  order 
to  assure  itself  of  full  compliance  with  its  laws,  it  requires 
the  filing  of  detailed  annual  reports,  and  the  payment  of 
an  annual  license  tax,  as  precautionary  measures.  It 
follows  that  organizations  of  this  type,  doing  business  in 
many  states,  may  find  themselves  obliged  to  prepare  and 
file  with  each  of  the  several  states  annual  reports  on  their 
financial  condition,  including  assets,  earnings,  liabilities, 
etc.,  and  to  pay  annually  to  each  a  franchise  tax  as  a 
prerequisite  to  doing  business. 

In  addition  to  requirements  pertaining  to  reports  and 
taxes,  there  are  also,  in  the  case  of  the  higher  forms  of 
organization,  certain  other  obligations  such,  for  example, 
as  prescribe  a  course  of  procedure  that  must  be  followed  in 
directing  the  activities  of  the  business,  namely,  in  directors' 
meetings,  stockholders'  meetings,  etc.  These  regulations 
are  intended,  not  only  to  protect  those  that  have  a  pro- 
prietary interest  in  the  business,  but  also  those  who  have 
extended  credit  to  it.  The  onerous  obligations  imposed 
upon  the  business,  are  seen  to  exhibit  great  variation,  de- 
pendent upon  the  type  of  entrepreneurial  organization 
adopted  by  those  who   establish  themselves   in   business. 

(g)  Legal  status.  —  The  legal  status  of  the  business  or- 
ganization also,  is  of  considerable  importance  to  the  en- 
trepreneur. The  question  that  he  must  ask  himself  in  this 
connection  is  "  Will  the  business,  as  such,  have  a  standing 
at  law,  and  can  it  sue  and  be  sued  in  its  own  name?  " 


THE    LEGAL    FOUNDATION  33 

It  is  held,  where  the  organization  has  been  established  by 
simple  contractual  agreement  among  the  entrepreneurs, 
such  as  is  employed  to  form  the  partnership,  that  the  result- 
ing organization  has,  in  itself,  no  standing  at  law  that 
will  enable  it  to  sue  or  to  be  sued  as  an  entity  or  person 
distinct  from  the  persons  of  the  partners. 

(h)  Sphere  of  activity.  —  Business  organizations  viewed 
from  the  standpoint  of  their  legal  sphere  of  activity,  that 
is,  the  latitude  that  they  enjoy  of  exploiting  a  field  of 
business  and  of  changing,  extending  or  narrowing  their 
operations,  fall  into  two  general  classes:  (1)  those  that  are 
unlimited  in  their  freedom  of  action  and  (2)  those  that  are 
obliged  to  confine  their  operations  to  specific  objects. 

(1)  The  type  of  business  organizations  that  enjoy  un- 
limited freedom  of  action,  may  enter  any  field  of  business 
that  is  not  specifically  withdrawn  from  private  enterprise, 
and  that  is  otherwise  lawful.  Within  these  limits,  they 
may  shift  from  one  type  of  enterprise  to  another,  or  ex- 
pand and  contract  at  will,  or  discontinue  the  undertaking 
at  will  without  formal  procedure  of  any  kind  and  without 
specific  sanction  of  the  state.  They  have  the  same  right 
and  freedom  of  action,  in  this  respect,  as  a  natural  person. 

(2)  Those  that  are  limited,  and  must  confine  their  ac- 
tivities to  such  objects  as  they  have  been  specifically 
authorized  to  undertake  and  pursue,  are  such  whose  legal 
status  is  that  of  artificial  persons,  like  the  corporation. 
As  artificial  persons  created  by  act  of  law,  their  powers 
and  freedom  of  action  are  confined  to  those  specifically 
granted  in  the  act  creating  them.  Thus,  a  corporation 
given  authority  to  go  into  the  paint  manufacturing  busi- 
ness, may  not,  of  its  own  free  will,  go  into  the  lumber 
business.  If  it  chooses  to  do  so,  it  must  secure  that 
authority  from  the  same  source  from  which  it  originally 
sprang. 

The  importance  of  this  characteristic  of  ownership  types, 


34     ECONOMIC    AND    LEGAL    FUNDAMENTALS 

as  well  as  others  that  have  been  considered  in  the  pre- 
ceding paragraphs,  may  easily  be  overemphasized.  They 
are  almost  purely  of  legal  significance  and  serve,  not  only 
as  a  means  to  measure  and  compare  the  efficacy  of  the 
several  types  of  entrepreneurial  organizations  that  are  to  be 
treated  in  this  text,  but  also,  in  part,  as  a  basis  of  classi- 
fication. 

Classification  of  Ownership  Organizations.  —  A  proper 
classification  of  entrepreneurial  organizations  must  take 
cognizance,  first,  of  the  broad  economic  principles  laid 
down  in  the  first  chapter  and,  second,  of  the  legal  charac- 
teristics peculiar  to  each  type. 

The  first  well-defined  basis  of  classification  rests  upon 
the  kind  of  capital  directly  employed  in  the  business  ven- 
ture. From  this  standpoint,  two  groups  are  distinguish- 
able, (1)  operating  organizations  which  own,  direct  and 
manage  a  business  plant  and  equipment  consisting  of  real 
and  money  capital,  and  (2)  combination  organizations  that 
employ  capital  in  business  through  the  medium  of  operating 
organizations. 

Next  must  be  considered  the  intimacy  with  which  the 
organization  is  attached  to  the  life  and  financial  soundness 
of  the  entrepreneur.  A  careful  study  of  the  legal  charac- 
teristics of  ownership  organizations  will  lead,  as  in  the  pre- 
ceding case,  to  a  division  into  two  well  defined  classes,  (a) 
personal  ownership  organizations  and  (b)  securities-issu- 
ing organizations.  The  former  are  those  that  the 
law  does  not  distinguish  from  the  person  of  the  entre- 
preneur, and  which  are  legally  terminated  and  dis- 
solved by  the  death  or  insolvency  of  any  entrepreneur 
actively  interested  in  them.  They  include  the  individual 
proprietorship,  the  participation  association  and  the 
partnership.  The  other  class  includes  those  that  con- 
tinue to  live  as  business  organizations  in  the  eyes  of  the 
law  even  though  one  or  more  of  the  entrepreneurs  should 


THE    LEGAL    FOUNDATION  35 

die  or  become  bankrupts.    The  joint  stock  company,  the 
corporation  and  the  securities  trust  make  up  this  class. 
The  classification  of  primary  types  may  now  be  recapit- 
ulated in  tabular  form  as  follows: 

Operating  organizations: 

a.  Personal  ownership 

1.  The  individual  proprietorship 

2.  Participation  association 

3.  Partnership 

b.  Impersonal  ownership  (securities-issuing  organi- 

zations) : 

4.  The  joint  stock  company 

5.  The  corporation 

6.  The  securities-issuing  trust 


PART  II 
PERSONAL  OWNERSHIP  ORGANIZATIONS 


R  285764 


CHAPTER   III 

THE  INDIVIDUAL  PROPRIETORSHIP  AND  THE 
PARTICIPATION    ASSOCIATION 

Personal  Ownership  Types.  —  The  personal  ownership 
types  of  entrepreneurial  organizations  include  the  indi- 
vidual proprietorship,  the  participation  association,  the 
partnership  and  the  simple  trust.  Historically,  they  may 
be  traced  back  to  the  earliest  period  of  history.  They  are 
as  old,  therefore,  as  civilized  society  itself.  With  the  pos- 
sible exception  of  the  trust,  they  were  well  known  to  the 
ancient  Egyptians,  Greeks  and  Romans  and  particularly 
to  the  Phoenicians,  who  were  the  great  commercial  peoples 
of  the  ancient  world.  Through  these  many  centuries  they 
have  come  down  to  us  with  but  slight  if  any  modification, 
and  as  long  as  the  institution  of  private  property  remains 
as  one  of  the  corner  stones  of  our  civilization,  they  will  re- 
tain a  place  in  the  business  world.  But,  as  already  indi- 
cated, the  relative  importance  of  these  organizations  for  the 
conduct  of  business,  has  dwindled  considerably  during  the 
past  century.  Nevertheless,  their  use  today  is  still  suffi- 
ciently extensive  to  warrant  a  careful  consideration  of  their 
peculiar  characteristics,  their  advantages  and  disadvan- 
tages as  well  as  their  general  serviceability  as  ownership 
organizations. 

The  Individual  Proprietorship.  —  The  individual  pro- 
prietorship is  a  form  of  entrepreneurial  organization  in 
which  the  business  is  under  the  sole  ownership,  control  and 
direction  of  a  single  entrepreneur  who  has  risked  his  private 
fortune  in  the  undertaking.     It  is  the  simplest  form  of 

39 


40       PERSONAL   OWNERSHIP    ORGANIZATIONS 

owncrsliip  organization.  By  reference  to  page  89  it  will  be 
shown  to  form  the  great  bulk  of  the  number  of  business 
establishments  in  this  country,  although  from  the  stand- 
point of  magnitude,  based  upon  the  number  of  wage  earners 
employed  and  the  value  of  product  or  amount  of  business 
done,  its  importance  in  the  business  field  is  relatively  much 
reduced.  The  numerical  preponderance  of  this  type  is 
accounted  for  by  its  simplicity  of  organization  and  direc- 
tion, and  by  the  ease  with  which  it  may  be  formed,  changed 
or  discontinued,  as  well  as  by  the  circumstance  that  the 
average  amount  of  capital  required  in  the  vast  majority 
of  business  undertakings,  particularly  in  the  commercial 
field,  is  comparatively  small. 

Characteristics.  —  The  chief  characteristics  of  the  indi- 
vidual proprietorship  have  already  been  somewhat  indi- 
cated in  the  preceding  chapter.  The  legal  rights,  powers, 
obligations  and  limitations  of  this  type  are  in  general 
identical  with  those  enjoyed  by  the  person  of  the  pro- 
prietor. The  law  does  not  recognize  the  individual  propri- 
etorship as  distinct  from  the  proprietor.  In  the  conduct 
of  his  business,  therefore,  he  need  but  conform  to  the 
general  rules  of  civil  right.  To  go  into  detail  concerning 
these  rules,  is  without  the  pale  of  this  text,  as  it  would  lead 
into  the  subject  of  civil  law.  A  few  brief  paragraphs  will 
suffice  to  bring  out  the  more  conspicuous  features  of  this 
type,  as  well  as  its  general  limitations. 

Formation.  —  Anyone  who  has  sufficient  capital  of  his 
own,  or  the  capacity  to  borrow  it.  can  easily  launch  a 
business  enterprise  as  an  individual  proprietor.  All  that 
he  needs  is  an  idea,  the  will  and  a  sufficient  command  over 
capital  to  establish  himself  in  business.  There  are  no  bind- 
ing contracts  limiting  his  freedom  of  action;  no  special 
authority  from  the  state  is  required,  and  he  need  consult 
no  one.  So  long  as  he  complies  with  the  general  provisions 
of  the  law,  he  may  conduct  his  business  freely  and  un- 


THE    INDIVIDUAL    PROPRIETORSHIP       41 

molested,  either  making  for  himself  a  profit  or  sustaining 
a  loss.  The  process  of  formation  is  simply  a  matter  of 
will,  coupled  with  a  capacity  for  its  effective  execution.  In 
so  far  then,  as  the  element  of  formation  is  concerned,  there 
could  be  no  greater  advantage  than  that  enjoyed  under  the 
individual  proprietorship. 

Durability.  —  Since  the  law  does  not  recognize  a  busi- 
ness conducted  as  an  individual  proprietorship  as  a  legal 
entity  distinct  and  apart  from  the  person  of  the  proprietor, 
it  follows  that  the  life  limit  of  the  proprietorship  is  coter- 
minous with  that  of  the  proprietor.  By  will  or  testament 
it  is  possible  for  the  proprietor  to  transmit  his  business  as 
a  going  concern  to  his  heirs.  Such  an  act,  however,  does 
not  serve  to  continue  the  original  organization  in  the  eyes 
of  the  law,  although  the  business  might  continue  active  as 
a  factor  in  the  industrial  world.  It  would  be  looked 
upon  as  under  the  ownership,  control  and  direction  of  a  new 
entrepreneurial  organization.  During  his  life  the  proprie- 
tor is  free  at  any  time  voluntarily  to  withdraw  from  busi- 
ness, either  discontinuing  it  in  part,  or  in  its  entirety,  or  by 
gift  or  sale  to  another.  Only  by  due  process  of  law  may 
the  business  organization  be  terminated  against  the  pro- 
prietor's will.  Should  the  state  require  the  property  in- 
volved for  some  public  purpose,  it  may  be  taken  from  the 
owner  by  right  of  eminent  domain  on  tender  of  its  fair 
market  value  by  the  state.  Or  should  the  business  become  a 
public  nuisance,  or  otherwise  injurious  to  the  public  wel- 
fare, the  proprietor  might  also  be  forced  to  terminate  his 
business  by  a  decision  of  the  proper  courts.  Also,  if  he 
should  be  legally  adjudged  insane,  or  legally  incompetent, 
the  courts  would  deprive  him  of  the  conduct  of  his  business 
and  place  in  his  stead  a  trustee  or  administrator,  who,  for 
all  business  purposes,  would  then  become  the  proprietor. 

Liability.  —  The  liability  that  the  individual  proprietor 
assumes  is  unlimited.     In  case  of  failure  of  the  business 


42       PERSONAL   OWNERSHIP    ORGANIZATIONS 

the  creditors  can  look  to  all  of  the  proprietor's  property, 
whether  employed  in  the  business  or  not,  for  the  satisfac- 
tion of  their  claims.  Not  only  the  assets  of  his  business, 
but  also  his  real  estate,  his  home  and  all  of  his  personal 
property,  with  the  exception  of  certain  small  exemptions 
provided  for  under  the  federal  and  state  bankruptcy  laws, 
may  be  sold  to  meet  his  business  debts.  He  stakes  all  upon 
the  chance  of  success  or  failure  of  the  undertaking. 

The  only  compensating  feature  in  connection  with  this 
unlimited  liability  lies  in  the  relatively  greater  credit  possi- 
bilities. The  borrowing  capacity  of  the  individual  pro- 
prietor is  not  so  narrowly  measured  by  his  business  assets, 
but  rather  by  the  sum  total  of  all  of  his  property.  Capital, 
however,  is  not  the  only  measure  of  a  man's  command 
over  credit.  His  personal  character  and  business  ability 
are  even  more  weighty  determinants.  But  even  when 
measured  by  these  qualities,  the  credit  advantage  of  the 
individual  proprietorship  type  of  organization  is  clearly 
recognized.  But,  on  the  other  hand,  some  types  of  entre- 
preneurial organization  afford  an  opportunity  to  limit  the 
liability  of  an  owner  to  a  definite  amount,  thus  diminishing 
the  risk  of  loss.  As  long  as  this  is  not  possible  under  the 
individual  proprietorship,  we  may  consider  its  unlimited 
liability  as  a  distinct  disadvantage  from  the  business  man's 
point  of  view. 

Direction  and  Control.  —  The  power  of  direction  and 
control  in  the  individual  proprietorship  is  vested  solely  in 
the  person  of  the  proprietor.  In  this  particular  he  re- 
sembles closely  the  ruler  of  an  absolute  monarchy.  This 
feature  has  its  advantages,  as  well  as  its  disadvantages. 
On  the  one  hand,  it  presents  a  high  degree  of  centraliza- 
tion of  authority  and  responsibility  in  the  proprietor.  It 
enables  him  to  act  promptly  in  all  business  matters,  to 
take  immediate  advantage  of  fluctuations  in  market  condi- 
tions or  of  unanticipated  opportunities  that  must  be  seized 


THE    INDIVIDUAL    PROPRIETORSHIP       43 

upon  without  a  moment's  loss  of  time.  It  is  often  just  such 
things  as  these,  that  throw  the  weight  in  favor  of  success, 
when  hesitancy  or  dehay,  such  as  is  frequently  unavoidable 
in  associative  organizations,  might  mean  loss  and  at  times 
even  complete  ruin.  On  the  other  hand,  this  indivisible 
ownership,  coupled  with  an  inherent  singleness  of  control, 
tends  to  make  it  difficult  to  secure  the  full  and  hearty  co- 
operation of  assistants  in  the  prosecution  of  the  venture. 
In  a  small  business,  this  is  not  such  an  important  matter, 
for  few  assistants  would  be  needed.  But  if  the  business  is 
large,  it  will  require  the  services  of  specialists  in  the  field 
of  purchasing,  sales,  manufacture,  etc.,  according  to  its 
nature.  To  be  sure,  the  proprietor  can  readily  hire  such 
specialists  to  help  him  in  the  management,  but  he  cannot 
give  them  a  true  share  in  the  business  without  destroying 
the  individual  proprietorship  organization.  This  circum- 
stance tends  to  make  it  more  difficult  to  secure  their  full 
cooperation  toward  the  successful  conduct  of  the  business, 
in  so  far  as  it  does  not  permit  of  the  use  of  the  entrepre- 
neurial incentive  to  tie  them  to  the  undertaking.  This 
disadvantage  may  be  overcome,  in  a  measure,  by  the  intro- 
duction of  some  system  of  profit  sharing  to  add  to  the  in- 
centive of  the  employee.  Such  schemes,  however,  are 
merely  palliatives,  in  that  they  are  useful  only  so  long  as 
the  business  makes  a  more  or  less  regular  profit,  and  they 
become  worse  than  useless  when  profits  fail. 

Capital  Limitations.  —  The  statistics  of  manufactures, 
given  in  a  following  chapter,^  show  clearly  a  very  rapid 
growth  in  the  size  of  the  average  manufacturing  establish- 
ment. They  indicate  also  a  steady  decline,  in  recent  years, 
in  the  size  and  importance  of  such  establishments  operated 
under  the  individual  proprietorship  type  of  ownership 
organization.  Among  others,  one  reason  for  this  —  and 
by  no  means  one  of  minor  importance  —  is  the  fact  that 

1  Chapter  V,  page  89. 


44       PERSONAL   OWNERSHIP    ORGANIZATIONS 

the  capital  requirements  of  the  typical  manufacturing  es- 
tablishment have  grown  to  such  magnitude  as  to  be  almost 
entirely  out  of  reach  of  the  average  individual.  By  1914 
it  had  reached  $76,982,  a  sum  such  as  a  proprietor  would 
find  it  cjuite  difficult  to  procure  in  investable  form,  even 
though  he  added  to  his  available  capital  such  funds  as  he 
might  be  able  to  borrow.  Furthermore,  why  should  he  take 
upon  himself  the  risk  of  putting  all  of  his  capital  into  a 
single  undertaking,  when  it  is  possible  to  participate  in 
numerous  undertakings  operated  under  security-issuing  or- 
ganizations? Also,  money  capital,  once  transformed  into 
real  capital  in  the  form  of  manufacturing  plant  and  equip- 
ment and  commercial  wares,  besides  being  subject  to  con- 
tinual depreciation,  is  not  again  quickly  reconverted  into 
available  money  capital  without  some  risk  of  loss.  This 
risk  is  naturally  much  greater  where  money  has  been  in- 
vested in  a  manufacturing  plant,  than  where  it  is  in  mer- 
chandise. But  if  the  same  funds  are  applied  to  business 
purposes  through  the  medium  of  security-issuing  organiza- 
tions, the  reconversion  into  money  capital  is  quite  generally 
assured  through  sale  of  the  securities  to  others.  These 
considerations  make  clear  the  limitations  attendant  upon 
the  individual  proprietorship.  Therein  lies,  also,  the  reason 
for  its  decline  in  importance. 

Evaluation.  —  By  and  large,  the  individual  proprietor- 
ship is  primarily  an  organization  adapted  to  small  enter- 
prises, where  close  personal  supervision  is  possible.  Enter- 
prises that  require  a  comparatively  large  fixed  investment, 
like  manufacturing,  because  of  the  relatively  greater  risk 
involved  due  to  the  difficulty  encountered  in  reconverting 
such  investment  into  money,  are,  as  a  rule,  not  desirable 
undertakings  under  this  form.  Mercantile  establishments, 
with  their  relatively  more  liquid  assets,  still  afford  an  ex- 
cellent field  for  the  proprietor.  Retailing  may  be  con- 
ducted on  a  small  scale,  as  well  as  on  a  large  one,  ranging 


THE    INDIVIDUAL    PROPRIETORSHIP       45 

from  tlie  cross  roads  country  store  to  the  large  department 
store  of  the  city.  The  extensiveness  of  the  business  can  be 
readily  adapted  to  the  capital  that  the  prospective  pro- 
prietor has  available  for  investment.  The  business  can 
be  expanded  as  the  capital  grows.  The  profits,  small 
though  they  may  be,  can  easily  be  put  back  into  the 
enterprise.  This  is  not  so  easy  in  manufacturing  under- 
takings, which  often  require  duplication  of  much  of  the 
original  equipment  in  order  to  increase  the  output.  The 
growing  size  of  manufacturing  establishments,  conse- 
quently, acts  to  exclude  the  individual  proprietorship  more 
and  more  from  that  field  of  mercantile  enterprise  where 
it  is  still  by  far  the  most  important  type  of  entrepre- 
neurial organization. 

The  Participation  Association.  —  Association  of  one  or 
more  individuals  for  the  undertaking  of  business  ventures 
is  found  to  have  been  rather  common  among  some  ancient 
peoples.  For  the  purpose  of  lightening  somewhat  the  ex- 
cessive burden  of  risk  inherent  in  the  maritime  commer- 
cial ventures  of  those  days,  there  sprang  up  a  type  of  busi- 
ness ownership  organization,  whereby  several  men  who  pos- 
sessed spare  funds  could  invest  them  without  the  excessive 
risk  of  loss  attendant  upon  the  individual  proprietorship. 
A  merchant,  not  wishing  to  risk  all  of  his  capital  in  fitting 
a  ship  and  supplying  a  cargo  for  some  foreign  port,  would 
enter  into  an  agreement  with  others,  under  which  the  latter 
agreed  to  supply  capital  in  money  or  wares,  being  liable 
only  for  the  amount  contributed,  and  foregoing  any  right 
in  the  management  and  direction  of  the  undertaking.  The 
merchant  thus  became  a  commandatary,  and  the  contrib- 
utors his  co-participants  in  the  venture,  to  share  in  the 
profits  or  losses  according  to  the  terms  of  the  agreement. 
The  business  was  then  conducted  by  the  commandatary  as 
if  it  were  an  individual  proprietorship. 

Toward  the  latter  days  of  the  empire,  the  Romans  also 


46       PERSONAL   OWNERSHIP   ORGANIZATIONS 

began  to  avail  themselves  of  this  type  of  organization. 
But  it  was  not  until  after  the  fall  of  the  Roman  Empire 
and  the  rise  of  the  power  of  the  Church,  that  association 
for  business  purposes  received  its  real  impetus.  The  canons 
of  the  church  forbade  taking  interest  on  loans.  As  a 
result  of  this  ban,  those  who  possessed  spare  funds  were 
hard  put  to  it  to  derive  an  income  from  them.  To  do  so, 
it  was  necessary  to  participate  in  business.  Under  these 
conditions,  there  arose,  during  the  eleventh  century  in 
•Italy  —  where  the  revival  of  commerce  first  made  its 
appearance  —  a  type  of  business  association  called  "  com- 
menda  "  or  "  acommenda."  This  commenda  was  formed 
by  secret  agreement  between  the  commandatary  who  was 
to  conduct  the  business  —  usually  a  single  venture  —  and 
one  or  more  participants  who  furnished  only  funds  or 
goods,  and  risked  no  more  than  their  original  contributions. 
In  its  dealings  with  third  parties  it  operated  as  an  indi- 
vidual proprietorship.  On  completion  of  the  undertaking 
the  profits,  if  any,  were  divided  ratably  on  the  basis  of 
contributions  or  upon  some  plan  agreed  upon,  and  the  asso- 
ciation was  automatically  dissolved. 

The  further  development  of  this  type  of  organization, 
followed  two  general  courses.  On  the  one  hand,  it  lost  its 
temporary  character  and  came  to  be  used  to  conduct  more 
or  less  permanent  business  establishments,  developing  later 
into  a  sort  of  partnership  of  the  type  employed  by  the 
great  Italian  banking  firms  of  the  Peruzzi  and  the  de 
Medici  families.  On  the  other  hand,  its  temporary  char- 
acter, as  well  as  the  element  of  secret  participation,  be- 
came emphasized ;  and  it  developed  into  the  "  participatio  " 
which,  with  minor  modifications,  is  the  model  upon  which 
is  patterned  that  class  of  organizations,  which  for  lack 
of  a  better  name,  and  in  order  to  avoid  technical  inexacti- 
tudes, wc  shall  designate  by  the  general  term  participation 
associations.    From  Italy,  this  type  of  organization  spread 


THE    INDIVIDUAL    PROPRIETORSHIP       47 

gradually  throughout  all  Europe,  where,  during  the  middle 
ages,  it  appears  to  have  been  one  of  the  chief  vehicles  of 
commerce.  Today,  it  still  is  of  sufficient  importance  to 
have  several  sections  of  the  commercial  codes  of  con- 
tinental European  and  Latin  countries  devoted  to  it. 

Definition  and  Nature.  —  A  participation  association  is 
a  business  organization,  arising  out  of  a  secret  contractual 
agreement  between  two  or  more  natural  persons,  for  the 
purpose  of  undertaking  and  concluding  one  or  more  single 
isolated  business  transactions,  under  such  form  and  condi- 
tions, and  with  such  division  of  interest,  as  may  be  agreed 
upon  by  the  participants.-  In  Italy  it  is  today  called 
associazione  in  participazione,  in  France  societe  en  partici- 
pation and  in  Germany  Gelegenheitsgesellschaft.  There  is 
no  exact  counterpart  for  these  organizations  under  English 
law.  In  the  United  States  and  the  United  Kingdom  the 
limited  partnership  with  a  dormant  or  sleeping  partner 
and  the  joint  adventure,  when  applied  to  single  ventures, 
most  nearly  resemble  it.  For  the  most  part  under  English 
law  this  type  is  treated  as  if  it  were  a  partnership.  ^ 

The  true  test  of  the  existence  of  a  participation  asso- 
ciation lies  in  the  requirement  that  its  existence  be  un- 
known to  those  with  whom  business  is  done.  The  existence 
of  the  agreement,  as  well  as  the  terms  thereof,  must  be 
known  only  to  the  participants;  otherwise,  it  at  once  be- 
comes a  partnership.  The  object  or  business  purpose  of 
the  association,  arises  at  the  moment  in  which  the  parties 
make  their  agreement,  and  does  not  endure  beyond  the 

2  Article  48  of  the  French  Commercial  Code  says  "  Ces  associa- 
tions sont  relative  a  une  ou  pleusieurs  operations  de  commerce,  elles 
ont  lieu  pour  les  objects,  dans  la  forme,  avec  les  proportions  d'in- 
teret  et   aux   conditions  convenues   entre   les  participants." 

Article  266  of  the  German  Commercial  Code  defines  it  as  "  die 
Vereinigung  zu  einzelnen  Handelsgeschaften  fur  gemeinschaftliche 
Rerhmmg." 

s  For  these  types  see  the  following  section  on  the  partnership, 
pp.  63  and  69. 


48       PERSONAL   OWNERSHIP    ORGANIZATIONS 

time  necessary  to  accomplish  it.  Thus,  two  men  attending 
a  horse  sale,  agree  between  themselves  to  purchase  a  cer- 
tain horse.  One  contributes  his  share  of  the  purchase  price 
as  agreed  upon,  and  the  other,  thereupon,  negotiates  the 
purchase.  As  long  as  the  relationship  arising  out  of  the 
agreement  between  the  two  is  unknown,  the  existence  of  a 
business  association  cannot  be  proven.  The  English  com- 
mon law  places  the  burden  of  proof  of  the  existence  of  a 
partnership  upon  him  who  relies  upon  its  existence,  and 
consequently,  it  does  not  differentiate  between  this  type 
and  the  partnership.  In  cases  brought  before  the  French 
courts  of  cassation,  it  has  been  held  that  the  exploitation  of 
a  mine,  the  operation  of  a  commission  house,  and  furnish- 
ing of  military  supplies  were,  in  the  particular  cases  cited, 
held  to  be  valid  objects  for  participation  associations.^ 
They  must  be  carefully  distinguished  from  contracts,  which 
closely  resemble  them,  such  as  contracts  for  the  extension 
of  loans  of  capital,  or  of  services  containing  provisions  en- 
titling the  lender  to  participate  in  the  benefits.  They  are 
also  frequently  confused  with  underwriting  syndicates, 
which  fall  more  properly  into  the  class  of  partnership,  in 
that  the  identity  of  those  interested  in  them,  is  usually 
known  to  the  person  on  whose  behalf  they  undertake  the 
marketing  of  securities.  ^ 

Property  and  Liability.  —  The  property  of  the  partici- 
pation association,  consists  of  such  tangible  and  intangible 
assets,  as  all  participants  agree  to  contribute.  It  may  in- 
clude even  commercial  credit,  provided  that  it  is  contrib- 
uted by  the  managing  participant,  in  whom  ownership 
of  all  property  is  held  to  be  vested.  At  law  all  increase  or 
loss  in  the  value  of  the  property,  and  even  the  profits,  be- 
long to  him.     On  completion  of  the  object  for  which  the 

■*  Juliu  —  C.  Valcanescou,  Des  societes  commercial  en  participa- 
tion.   Paris,  1916.    Pp.  27-28. 

6  For  a  description  of  underwriting  syndicates  see  the  following 
section  on  the  partnership,  page  69. 


THE    INDIVIDUAL    PROPRIETORSHIP       49 

association  is  formed,  he  is,  of  course,  obliged  to  share  the 
profits  with  the  participating  members,  as  contemplated  in 
the  agreement.  As  a  corollary  to  this  concept  of  ownership 
of  property,  it  follows,  that  the  managing  participant  as- 
sumes full  and  final  liability  for  any  debts  or  obligations 
that  he  may  have  incurred,  while  the  other  participants  risk 
only  what  they  have  contributed. 

Management  and  Direction.  —  The  management  and 
direction  of  operations  is  in  the  hands  of  the  managing 
participant.  There  may  be  several  such,  as  in  cases  where 
goods  are  bought  under  a  participation  agreement  and  are 
allotted  to  the  several  participants,  who  thereupon  separate 
and  go  into  different  parts  of  the  community  or  country  to 
sell  their  allotments,  in  accordance  with  the  terms  of  agree- 
ment. Each  thus  has  full  management  and  direction  of 
his  assigned  share  in  the  execution  of  the  contract  as  though 
he  were  an  individual  proprietor.  The  principal  obligation 
of  the  managing  participant  is  to  render  account  of  all 
transactions  concluded  under  the  terms  of  the  agreement  to 
his  co-participants.  Toward  third  parties,  his  obligations 
and  rights  are  the  same  as  those  of  the  individual  pro- 
prietor. 

Legal  Status.  —  This  form  of  business  organization  en- 
joys neither  a  legal  nor  a  commercial  entity.  Suit  of  any 
kind,  must  be  brought  against  the  managing  participant  as 
an  individual  person,  and  if  suit  is  to  be  brought  on  behalf 
of  the  association,  it  must  be  by  him,  in  his  own  name  only. 
The  reason  for  this  lies  in  the  nature  of  the  association 
agreement,  which  is  secret,  and  does  not  contemplate  any 
act  which  would  in  any  way  place  an  obligation  upon  any 
participant,  other  than  the  manager,  toward  third  parties. 

As  distinct  from  other  forms  of  business  association,  this 
form  has  no  social  entity  or  right.  An  individual  pro- 
prietorship is  known  by  the  name  of  the  proprietor ;  a  part- 
nership, by  the  names  of  the  partners,  or  by  the  firm  name; 


50       PERSONAL   OWNERSHIP   ORGANIZATIONS 

and  a  corporation  by  its  adopted  name.  They  are  busi- 
ness establishments,  and  as  such  have  a  social,  even  if  not 
a  legal,  being.  But  the  participation  association  has  no 
name  known  to  the  business  world,  by  which  it  may  be 
identified. 

Dissolution.  —  The  participation  association  may  be 
dissolved  by  such  causes,  both  voluntary  and  involuntary, 
as  would  have  the  same  effect  upon  other  organizations. 
Dissolution  through  bankruptcy,  however,  is  somewhat 
restricted.  The  association,  as  such,  cannot  go  into  bank- 
ruptcy because  it  is  not  a  social  entity ;  but  the  voluntary  or 
involuntary  bankruptcy  of  the  managing  participant  may 
ensue  if  he  cannot  meet  his  obligations,  in  which  case  the 
association  terminates.  In  any  event,  the  pressure  forcing 
bankruptcy,  must  come  from  without  the  organization. 
The  co-participants  have  no  power  or  right  under  law,  to 
force  bankruptcy  upon  the  managing  participant,  or  to 
demand  the  liquidation  of  the  business. 

Limitations  and  Uses.  —  It  can  be  seen  that  the  very 
nature  of  the  participation  association,  makes  it  unsatis- 
factory as  an  ownership  organization  under  which  to  con- 
duct a  permanent  business  establishment.  But  its  ad- 
vantages and  serviceability  in  undertakings  that  have  as 
their  object  a  single  transaction  are  equally  obvious.  It  is 
particularly  useful  to  those  seeking  to  conceal  their 
identity,  but  desiring  to  participate  in  ventures  entailing 
a  high  degree  of  risk,  and  where  success  produces  a  large 
profit.  The  identity  of  such  participants  is  not  known; 
and  moreover,  the  odium  of  speculation  does  not  become 
associated  with  them  when  they  participate  in  risky  ven- 
tures. Of  course,  it  in  no  way  affords  any  protection  to 
the  managing  participant,  other  than  to  relieve  him  of  the 
liability  that  he  would  be  obliged  to  assume  if  he  undertook 
the  venture  alone  and  rounded  out  his  capital  requirements 
through  loans.     Its  two  chief  uses,  thus,  are  for  conceal- 


THE    INDIVIDUAL    PROPRIETORSHIP       51 

ment  of  identity  of  participants  in  speculative  ventures, 
and  to  enable  entrepreneurs  with  insufficient  capital  to 
undertake  ventures  in  business  as  managing  participants. 

The  extent  to  which  use  is  made  of  this  type  of  organi- 
zation in  modern  business,  cannot  be  ascertained.  Doubt- 
less it  runs  up  into  the  hundreds  of  thousands  daily.  Most 
of  these  undertakings,  to  be  sure,  are  small,  but  neverthe- 
less, they  must  make  up  a  substantial  portion  of  the  annual 
business  of  those  countries  that  recognize  the  participation 
association  as  a  type  of  entrepreneurial  organization. 

Significance.  —  This  organization  is  important  chiefly 
because  it  was  the  embryo  out  of  which  grew  many  of  the 
modern  forms  of  organization.  It  established  the  prin- 
ciple of  contributions  of  capital  from  two  or  more  persons 
for  the  purpose  of  engaging  in  a  single  business  enterprise. 
The  partnership  with  all  of  its  modifications  and  the  joint 
stock  company  may  be  traced  back  directly  to  it,  while 
through  these  it  has  exercised  a  strong  influence  in  shaping 
the  general  structure  of  the  business  corporation. 


(S 


CHAPTER   IV 

THE   PARTNERSHIP 

The  ordinary  partnership,  or  firm,  is  the  simplest  form  oi 
associative  business  organization  that  enjoys  recognition 
in  business  circles  as  a  unified  and  single  establishment. 
As  a  modern  business  institution,  its  history  may  be  traced 
back  to  the  Italian  commenda  of  the  eleventh  century. 
During  the  middle  ages,  it  grew  into  the  most  important 
form  of  private  business  organization;  and  with  slight 
modifications,  was  the  form  under  which  the  great  banks 
and  big  business  of  that  period  generally  were  conducted. 
It  was  later  driven  from  its  premier  position  by  the  need 
of  securing  greater  quantities  of  capital  for  the  conduct  of 
the  trading  enterprises  that  sprang  up  following  the  period 
of  discovery  subsequent  to  1492.  It  thus  developed  into 
the  joint  stock  company.  Today,  it  is  no  longer  as  im- 
portant in  the  field  of  big  business,  but  still  continues  to 
enjoy  some  favor  as  a  form  of  organization  for  the  conduct 
of  small  businesses. 

Definition.  —  The  partnership  has  been  defined  as  "  a 
relation  existing,  by  virtue  of  a  contract,  express  or  im- 
plied, between  persons  carrying  on  a  business  owned  in 
common,  with  a  view  of  profit  to  be  shared  by  them."  ^  . 
/"^At  law,  the  partnership  is  simply  a  definite  relation  be- 
tween certain  persons,  called  partners.    It  is  not  a  thing  of 
itself,   but  merely   a   condition.     Consequently   it   is   not 
;    considered  to  be  a  single  person   at  law,   and   all  of  its 
legal  relations  must  be  conducted  and  met  by  the  individual 
partners. 
1  E.  A.  Gilmore,  Handbook  on  the  Law  oj  Partnership,  1911,  p.  1 


THE    PARTNERSHIP  63 

But  very  different  is  its  standing  in  the  business  com- 
munity. The  multiplicity  and  individuality  of  the  co- 
partners are  lost  sight  of,  or  at  least  minimized  in  im- 
portance. What  the  law  does  not  recognize  as  a  legal  per- 
son, the  business  community  recognizes  as  r.n  economic 
business  unit,  equally  as  capable,  and  in  many  respects 
much  more  capable,  of  becoming  the  vehicle  for  conducting 
a  business  enterprise  than  if  the  individuals  who  compose 
it  acted  each  for  himself.  Business  must  be  conducted  in 
the  name  of  the  partnership. 

Formation,  —  the  contract.  —  Ordinarily,  in  this  coun- 
try, as  in  England,  partnerships  are  formed  by  contractual 
agreement  under  common  law  rules  between  the  parties 
affected.  In  most  other  countries,  such  common  law  rules 
have  been  codified  and  incorporated  into  commercial  codes. 
The  common  law  applies  equally  in  all  of  the  states  -  of  the 
union ;  but  in  most  of  them  the  provisions  relating  to  part- 
nership agreements  have  been  assembled  and  by  legisla- 
tive act  issued  as  statutes.  In  addition  to  these  statutes, 
many  states  have  special  statutes  governing  the  formation 
and  operation  of  limited,  special  and  silent  partnerships. 

The  contract,  or  articles  of  co-partnership,  that  creates 
the  organization,  must  be  a  legally  valid  contract;  that  is, 
the  contracting  parties  (in  this  case  the  several  partners) 
must  be  legally  competent;  the  subject  matter  of  the  con- 
tract, and  the  purpose  of  the  partnership  must  be  reason- 
ably possible  of  accomplishment  and  also  lawful,  there  must 
be  a  legal  consideration  and  an  observance  of  the  proper 
formalities  required  by  law.  It  is  advisable,  but  not  neces- 
sary, that  the  contract  be  reduced  to  writing. 

Ordinarily,  every  mature  person  is  legally  competent  to 
enterjnto  a  partnership  agreement.  Felons,  infants  and 
lunatics,  however,  are  debarred.    Married  women  are  com- 


petent only  in  such  states  where  the  statutes  have  so  modi- 
2  An  exception  should  be  noted  in  the  case  of  Louisiana. 


54       PERSONAL   OWNERSHIP   ORGANIZATIONS 

fied  the  common  law  as  to  declare  them  capable  of  con- 
tracting in  their  own  name.     A   similar  rule   applies  to 
corporations  and  firms;  that  is  to  say,  they  may  become 
parties  to  partnership  agreements  only  where  specifically 
authorized  by  statute.     For  the  most  part,  however,  the 
ordinary  partnership  is  formed  by  natural,  mature  persons. 
/^"""The  consideration  must  be  some  obligation  undertaken 
'     by  the  parties,  which  ordinarily  they  would  not  be  obliged 
K    to  assume.    This,  however,  is  a  simple  matter,  for  it  has 
been  generally  accepted  by  the  courts  that  a  mutual  agree- 
ment with  respect  to   a   common  enterprise  is   sufiicient 
consideration. 

A  partnership  agreement  to  carry  on  an  unlawful  enter- 
prise, such  as  is  contrary  to  the  laws  of  the  land,  or  against 
the  best  interests  of  society,  will  not  have  the  sanction 
of  the  courts;  and  the  parties  thereto  would  be  denied  the 
protection  of  the  law. 

The  formalities  required  by  law  in  this  country  are 
generally  quite  simple.  In  most  states  the  filing  of  a  copy 
of  the  articles  of  co-partnership,  or  some  other  evidence 
of  the  creation  of  the  organization,  is  required,  while  in 
others  no  formality,  whatever,  is  prescribed.  In  Europe, 
under  the  commercial  codes  it  is  a  common  practice  to  re- 
quire all  partnerships  to  give  certain  information  con- 
cerning the  nature  of  the  business,  the  amount  of  capital, 
etc.,  and  the  name  under  which  it  is  to  operate  to  a  gov- 
ernment bureau  which  inserts  this  information  in  the  offi- 
cial commercial  register  for  the  benefit  of  the  public.  The 
latter  plan  is  by  far  preferable,  because  this  register  may 
be  introduced  as  evidence  of  the  existence  of  a  partnership; 
whereas,  in  the  United  States  the  burden  of  proving  the  ex- 
istence of  a  partnership  rests  upon  him  who  relies  upon 
its  existence.  Thus,  if  a  person  enters  into  a  contract  for 
the  sale  of  goods  to  one  who  represents  himself  as  purchas- 
ing for  a  firm  and  afterwards  sues  the  partners  on  the  con- 


THE    PARTNERSHIP  55 

tract  he  must  present  evidence  that  a  partnership  really 
exists. 

At  what  precise  time  a  partnership  is  created  is  a  ques- 
tion that  has  frequently  come  before  the  courts  for  decision. 
On  this  point  it  is  now  the  generally  accepted  rule,  that  the 
mere  act  of  signing  a  contract,  or  entering  into  a  partner- 
ship agreement,  does  not  of  itself  create  the  partnership. 
The  partners  must  actually  begin  doing  business  in  ac- 
cordance with  the  terms  of  the  contract.  It  is  the  legal 
intentions  of  the  parties,  clearly  manifested  by  their  acts, 
that  determines  whether  a  partnership  exists,  and  not 
their  secret  intention.  Thus,  a  single  sale  or  purchase  that 
would  place  a  business  obligation  upon  the  partners  would 
be  sufficient. 

■~  When  the  contract  is  set  to  writing,  as  is  usually  the  case 
when  the  partnership  business  is  a  large  one  or  the  partners 
are  numerous,  the  document  is  commonly  called  articles  of 
co-partnership.  Such  articles  of  co-partnership  ordinarily 
contain  clauses  on  the  following  matters: 

(a)  The  names  of  the  parties  to  the  agreement. 
(5)  The  name  under  which  the  firm  is  to  do  business. 

(c)  The  amount  and  nature  of  the  original  contributions 
of  capital,  including  real  and  personal  property,  money, 
etc.,  with  which  the  partnership  is  to  commence  business, 
and  the  share  thereof  contributed  by  each  partner. 

(d)  The  extent  to  which  each  partner  shall  be  permitted 
to  participate  in  the  profits  and  losses  and  in  the  direction 
and  management  of  the  enterprise,  and  whether  or  not  all 
shall  be  actively  engaged. 

(e)  Provisions  relative  to  the  distribution  of  assets  in 
case  of  dissolution. 

(/)  Provisions  governing  dissolution  and  arrangements, 
if  any,  for  the  continuance  of  the  business  in  case  of  with- 
drawal, death  or  bankruptcy  of  any  partner. 


56       PERSONAL   OWNERSHIP    ORGANIZATIONS 

/    ig)   Frequently  also  a  section  prescribing  the  method  of 
accounting  and  bookkeeping  that  is  to  be  installed  and 

'maintained. 

I      [h]  Lastly,  the  signatures  of  the  parties  to  the  agree- 

I  ment. 

Legal  Nature  and  Legal  Actions.  —  The  partnership  is 
not  a  legal  entity,  that  is,  it  has  no  standing  in  law  as  a 
business  unit  and  can  neither  sue  nor  be  sued  as  a  firm.  The 

^law  recognizes  only  the  contractual  relationship  between 
the  persons  directly  parties  thereto,  but  does  not  recognize 
such  an  agreement  as  in  any  way  limiting  the  rights  of 
others  in  their  dealings  with  the  individual  partners.  In 
so  far,  therefore,  as  non-partners  are  concerned  their  legal 
rights  lie  against  the  partners  as  individuals;  and  the 
partners  themselves  must  exercise  their  legal  rights  as  in- 
dividual persons  before  the  courts. 

y'^^ince  under  the  ordinary  partnership  agreement  each 
/  partner  becomes  agent  for  the  others  in  all  business  repre- 
I  sented  to  be  on  behalf  of  the  firm  and  generally  within  the 
scope  of  the  business,  it  follows  that  a  third  person,  not 
a  member  of  the  firm,  may  seek  redress  on  any  such  con- 
tract not  solely  against  the  partner  with  whom  he  entered 
into  the  transaction,  but  also  against  any  of  the  other 
partners.  Consequently  when  suit  is  brought  against  the 
firm  on  a  contract  it  may  be  brought  against  any  partner 
or  against  all  of  them ;  but  it  cannot  be  brought  against  the 
firm  in  the  firm's  name.  In  practice  such  suits  are  com- 
monly directed  against  the  several  partners  individually 
and  at  the  same  time  against  all  of  them  jointly.  This 
applies  also  to  other  actions  at  law.  In  legal  phraseology 
it  is  said  that  actions  are  by  or  against  the  partners  "  sev- 
erally and  jointly." 

Rights  and  Obligations  of  Partners  toward  One 
Another.  —  The  rights  and  obligations  that  ordinarily 
attach  to  partners  are  to  participate: 


THE    PARTNERSHIP  57 

(a)  In  the  direction  and  management  of  the  enterprise, 
and 

(6)   In  its  assets,  profits  and  losses. 

In  case  no  special  provision  defining  the  rights  and  obli- 
gations  of  the   several   partners   relative  to  the  matters 
mentioned   above   is   made   in   the    contract    creating   the 
partnership,  the  common  law  rules  or  statutes,  if  any,  are 
held  to  govern.    But  if  any  provision  deviating  from  com- 
mon law  practice  and  permissible  under  statutes  is  con- 
tained in  the  contract,  such  provision  is  held  to  take  pre- 
cedence over  the  common  law  rules,  as  it  is  evidence  of  the 
intention  of  the  parties  on  the   point  in   question.     The 
advisability  of  having  the  contract  set  to  writing  is  at  once 
apparent.     Under    a    verbal    contract    disputes    can    arise 
which,  with  no  evidence  at  hand  to  indicate  just  what  the 
intention  of  the  parties  may  have  been,  may  easily  lead  to 
mutual  distrust  and  final  dissolution  of  the  organization. 
(a)      Participation    in    direction    and    management.  — 
A  Under  the  general  partnership  form  of  organization  each 
'      partner  has  the  right  to  participate  in  the  management  and 
direction  of  the  enterprise,  unless  he  agrees  to  forego  it. 
Having  this  right,  it  then  becomes  a  duty  that  he  owes  to 
V     his  co-partners  to  take  an  active  part  in  the  business,  con- 
\  tributing  the  best  of  his  skill,  his  services  and  business 
\  acumen  toward  the  success  of  the  venture.     But  in  exer- 
/cising  his  right  of  management  and  direction  he  must  con- 
/  stantly  bear  in  mind  that  his  decisions  and  acts,  and  par- 
1  ticularly  his  business  contracts  with  third  parties  do  not 
y  bind  himself  alone,  but  also  his  co-partners.     This  wide 
/  latitude   of   freedom   of   contract   accorded   each   partner 
/     under  the  law  makes  necessary  not  only  a  high  standard  of 
business  morality  coupled  with  mutual  cooperation  on  the 
part  of  the  partners,  but  also  a  healthy,  mutual  respect  for 
^     the  rights  that  each  enjoys  under  the  terms  of  the  agree- 
\    ment. 


58       PERSONAL   OWNERSHIP    ORGANIZATIONS 

To  require  a  joint  conduct  of  the  business  might  easily 
result  in  serious  difficulties.  Even  where  there  are  but  two 
partners,  agreement  is  sometimes  hard  to  secure.  But  where 
there  are  five  or  six  the  chances  of  disagreement  are  con- 
siderably multiplied,  and  were  it  made  obligatory  upon  the 
partners  to  come  to  a  unanimous  decision,  such  a  rule 
could  serve  no  purpose  other  than  to  obstruct  the  firm 
in  its  business  dealings.  In  order  that  difficulties  such  as 
these  may  be  avoided  as  much  as  possible,  it  is  the  com- 
mon law  rule,  where  there  are  more  than  two  members  to 
an  ordinary  partnership,  that  the  majority  of  such  partners 
are  empowered  to  carry  a  decision  affecting  the  firm  even 
though  one  or  more  dissent,  unless  the  agreement  requires 
a  unanimous  decision.  In  any  case  it  is  perhaps  the  better 
practice  to  appoint  one  or  two  of  the  partners  as  managers 
of  the  ordinary  affairs  of  the  business  and  to  reserve  gen- 
eral matters  of  pulicy  for  the  consideration  and  substantial 
agreement  of  all.  This,  however,  would  not  exclude  the 
others  from  exercising  their  right  of  participation  in  the 
management  and  direction  of  the  business  unless  it  is  so 
stipulated  in  the  partnership  agreement  and  has  been 
generally  accepted. 

In  case  of  gross  mismanagement  on  the  part  of  a  partner 
resulting  in  loss  or  injury  to  the  other  partners,  the  courts 
may  be  appealed  to  to  exclude  the  culpable  partner  from 
exercising  his  managerial,  powers.  But  this  would  be  but  a 
make-shift  solution  of  such  difficulties.  The  better  prac- 
tice in  such  cases  is  to  arrive  at  some  equitable  basis  for  the 
withdrawal  of  the  culpable  member. 

In  all  transactions  on  behalf  of  the  firm  each  partner 
must  always  exercise  his  best  judgment  and  employ  as 
much  care  in  his  dealings  as  though  he  were  working  for 
himself  alone.  The  law  places  upon  him  an  obligation  in 
the  nature  of  a  trust.  If  he  violates  this  trust  causing  loss 
to  the  firm  he  can  be  required  to  make  good  such  losses. 


THE    PARTNERSHIP  59 

As  agent  of  the  other,  each  partner  quite  generally  has 
the  right  and  power  to  contract  with  outsiders  on  behalf 
of  the  firm  and  thus  to  bind  his  co-partners  on  the  con- 
tract. But  this  right  does  not  hold  where  the  use  of  sealed 
instruments  is  required,  nor  generally  where  the  transfer 
of  real  property  or  the  fixed  assets  of  the  business  is  con- 
templated by  one  partner  acting  on  his  own  authority. 
/  Each  partner  is  also  held  to  be  liable  for  defamatory 
{  statements  of  one  partner,  or  for  fraud  committed  by  such 
partner  in  course  of  a  business  transaction  for  the  firm, 
even  though  his  co-partners  have  no  knowledge  of  such 
act. 

\'Each  partner  also  has  the  right  to  inspect  the  books  and 
accounts  of  the  firm  without  restriction. 

(6)  Right  to  participate  in  assets,  profits  and  losses. — 
The  business  capital  of  the  partnership  consists  of  the 
aggregate  property  in  terms  of  money  contributed  by  the 
several  members  to  establish  or  to  continue  the  business.  A 
distinction  should  be  noted  •  between  the  capital  and  the 
partnership  property.  The  latter  includes  the  capital  and 
real  and  personal  property,  patents,  copyrights,  etc.,  origi- 
nally contributed  or  subsequently  acquired  and  not  yet 
distributed  among  the  several  partners.  The  contract 
determines  what  share  of  the  capital  each  partner  is  to 
contribute.  The  law  does  not  require  that  each  member 
must  make  a  capital  contribution.  While  some  may  choose 
to  do  so,  others  may  agree  to  contribute  their  services  or 
skill  in  lieu  of  capital.  The  manner  of  making  capital 
contributions  is  governed  by  the  ordinary  provisions  of 
law  relating  to  transfers  of  real  and  personal  property.  In 
the  case  of  transfer  of  real  property  a  sealed  instrument  is 
usually  required.  Such  real  property  cannot  be  held  in  the 
firm  name  but  only  in  the  names  of  the  partners  as  indi- 
viduals because  it  is  necessary  for  a  legal  person  to  hold 
land  or  realty. 


60       PERSONAL   OWNERSHIP   ORGANIZATIONS 

Title  to  the  property,  with  the  exception  of  real  estate, 
is  vested  in  the  partners  jointly.  Each  partner's  share  en- 
titles him  simply  to  a  given  portion  of  what  remains  after 
all  of  the  firm's  debts  have  been  paid.  The  extent  to 
which  he  is  to  share  in  the  property  on  dissolution  is 
usually  based  on  his  original  capital  contribution  and 
should  appear  on  the  books  of  the  firm.  He  is  not  entitled 
to  a  partition  or  division  of  the  property  in  kind.  Division 
in  kind  is  indeed  sometimes  quite  impossible,  as  where  one 
partner  of  a  firm  that  owns  a  single  ship  withdraws.  He 
could  quite  obviously  not  be  permitted  to  take  away  part 
of  a  ship,  but  must  be  content  with  money  or  such  detach- 
able property  as  all  might  agree  upon.  Only  upon  final 
,  dissolution  of  the  firm  does  a  partner  receive  the  full 
amount  of  his  share  in  the  assets,  either  with  his  ratable 
Vhare  of  profit  added  on  or  with  the  losses  deducted. 

No  partner  may  withdraw  from  the  partnership  his 
share  of  the  property  or  assets,  nor  may  he  speculate  with 
the  firm's  property  nor  mortgage  its  real  estate  or  generally 
sell  its  property  not  ordinarily  held  for  sale  without  the 
consent  of  the  other  partners.  The  same  rule  applies  also 
to  creditors;  they  may  not  withdraw  any  particular  share 
of  the  property  to  satisfy  their  claim.  Upon  dissolution 
of  the  partnership,  however,  each  partner  is  held  to  have 
power  to  sell  the  assets  in  order  to  wind  up  the  affairs  of 
the  firm. 

Sale  of  the  vendible  property  of  the  business,  that  is  to 
say  of  such  property  as  is  held  and  offered  for  sale  by  the 
firm,  may  be  effected  by  any  or  all  of  the  partners  or  by 
someone  authorized  to  represent  them.  The  non-vendible 
property,  including  real  estate,  and  the  more  permanent 
business  assets  requires  the  common  agreement  of  all 
partners  for  its  disposal  either  in  whole  or  in  part  or  for 
the  sale  of  such  share  as  one  or  more  partners  may  have 
in  the  firm.    But  in  no  case  may  even  all  of  the  partners 


THE    PARTNERSHIP  61 

agree  to  dispose  of  the  firm's  property  in  such  a  way  as 
to  hinder,  delay  or  defraud  the  creditors  of  the  firm. 
''^Each  partner's  share  in  the  profits  and  losses  may  be 
fixed  by  the  terms  of  the  agreement.  In  so  far  as  the 
partners  themselves  are  concerned  these  terms  would  gov- 
ern, but  this  does  not  work  to  limit  the  liability  assumed 
by  each  partner  for  credit  extended  by  third  parties.  In 
other  words,  the  terms  of  the  agreement  place  no  restric- 
tion upon  the  obligation  of  co-partners  toward  third 
parties. 

Obligations  of  Partners  toward  Third  Parties.  —  It  is 
particularly  in  the  obligation  of  the  partners  toward  third 
parties  and  in  the  rights  of  such  third  parties  against  the 
partners  and  the  business  that  the  peculiar  character  of 
the  partnership  form  of  entrepreneurial  organization  is 
most  clearly  brought  out. 

With  the  beginning  of  business  relations  with  outside 
parties  the  partnership  becomes,  for  all  legal  and  com- 
mercial purposes  an  established  business  organization.  We 
have  seen  that  by  virtue  of  law  each  partner  is  the  -agent 
of  the  others  in  all  transactions  undertaken  by  him  with 
third  parties,  if  such  transactions  are  on  behalf  of  the  firm, 
and  that  the  burden  of  proof  of  the  existence  of  a  partner- 
ship rests  upon  him  who  relies  upon  its  existence.  A  third 
party,  therefore,  is  not  required  by  law  to  prove  the  exist- 
ence of  a  partnership  in  order  to  recover  on  a  contract 
entered  into  with  one  of  the  partners,  for  he  may  hold 
him  responsible  as  an  individual  acting  on  his  own  behalf; 
but  if  he  desires  to  hold  each  partner  responsible  as  prin- 
cipal of  the  one  acting  as  agent,  he  must  be  able  to  prove 
the  existence  of  the  partnership.  The  importance  of  this 
distinction  is  clearly  brought  out  by  a  consideration  of 
)artnership  liability. 

(a)  Liability  of  partners  for  debts.  —  To  third  parties, 
on  all  contracts  entered  into  on  behalf  of  the  firm,  the  part- 


62       PERSONAL   OWNERSHIP   ORGANIZATIONS 

ners  are  liable  jointly  and  severally.  Every  debt  that  is 
incurred  on  behalf  of  the  partnership  is  at  the  same  time 
the  debt  of  all  jointly  and  of  each  privately,  encumbering 
not  only  the  assets  directly  employed  in  the  business,  but, 
if  these  do  not  suffice,  also  the  private  fortunes  of  the 
several  partners. 

This  liability  attaching  to  each  partner  individually, 
follows  him  even  though  he  has  withdrawn  from  the  firm. 
If  the  creditor  is  actually  given  notice  of  the  withdrawal 
of  a  partner  upon  a  certain  date,  he  may  hold  that  partner 
liable  only  on  contracts  entered  into  prior  to  his  with- 
drawal, until  such  time  when  all  of  his  claims  have  been 
satisfied.  If,  however,  the  partner  withdraws  without  giv- 
ing actual  notice  to  the  creditor,  the  latter  may  still  hold 
the  former  liable  on  contracts  entered  into  on  behalf  of 
the  firm  during  such  period  of  time  as  he  remained  ignorant 
of  the  partner's  withdrawal. 

(6)   Creditor's      satisfaction.  —  Every      creditor      may 

choose  how  he  shall  satisfy  his  claims.    He  may  sue  either 

as  a  creditor  of  the  firm,  or  as  a  creditor  of  a  partner. 

If  he  sues  as  creditor  of  the  firm,  suing  the  partners  jointly 

he   can  recover,   ordinarily,   only  to  the   amount  of   the 

partnership's  assets;  whereas,  if  he  sues  as  creditor  of  each 

partner,  suing  them  severally,  he  can  recover  not  only  out 

of  the  assets  of  the  business,  but  if  they  are  insufficient  to 

satisfy  his  judgment,  also  out  of  the  private  fortunes  of  the 

individual  partners.     Suits  by  creditors  against  partners 

are  usually  brought  against  them  jointly  and  severally.    A 

judgment  secured  in  this  way  would  first  exhaust  the  assets 

directly  employed  in  the  business  before  it  would  draw 

upon  the  partners'  private  fortunes. 

|f      (c)  Alteration  of  the  partnership  agreement.  —  Since  the 

li  partnership  is  the  result  of  a  contract  between  the  several 

'I  partners,   it   follows   that  the   partners  may   by    common 

jj  consent  change  that  relationship  at  will.  '  In  so  doing,  how- 


THE    PARTNERSHIP  63 

ever,  they  must  guard   against   adopting  alteration  that 
will  affect  adversely  the  rights  of  third  parties.    The  right 
of  creditors  in  case  of  the  withdrawal  of  a  partner  has  al- 
ready been  discussed.     It  has  also  been  pointed  out  that 
the  partners  may  not  dispose  of  the  partnership  property 
without  first  satisfying  the  creditors.    Substitution  of  one 
partner  by  another  person  may  also  be  effected,  provided 
the  interests  of  the  third  parties  are  safeguarded.     And 
even  in  case  of  dissolution  and  discontinuance  of  the  busi- 
ness must  proper  care  be  taken  to  protect  the  rights  of  the 
firm's  creditors. 
^     Classification    of    Partners.  —  Partners    are    commonly 
/    classified  on  the  basis  of  some  special  advantage  or  obli- 
V   gation  that  is  extended  them  under  the  partnership  agree- 
\ment   into   general,   special,   ostensible,   secret,   silent,   or 
Mormant  partners. 

General  partners  jire  such  as  have  unlimited  liability  and 
full  voice  in  the  management  and  direction  of  the  enter- 
prise. 

Special  partners^  are  those  whose  liability  for  debts  of  the 
firm  has  been  limited.  Creditors  must  usually  be  advised 
what  partners  are  special  and  to  what  extent  they  enjoy 
limited  liability. 

Ostensible..joartnfi^  are  such  whose  connection  with  the 
firm  is  openly  avowed  and  relied  upon  by  creditors,  al- 
though they  are  parties  to  the  agreement  by  inference  only. 
Tiiey  may  be  held  liable  by  creditors  if  they  do  not  specifi- 
cally deny  having  any  connection  with  the  firm. 

SecneLjiartners  are  those  whose  connection  with  the  firm 
is  concealed  or  at  least  not  made  public.  They  are  usually 
also  silent. 

Silent  partners  have  no  voice  in  the  management  but 
share  in  the  profits  and  losses. 

Dormant  partners  (also  called  "  sleeping  ")  are  those  in 
whom  the  characteristics  of  secret  and  silent  partners  are 


64       PERSONAL   OWNERSHIP   ORGANIZATIONS 

combined.  Under  English  jurisprudence,  a  partnership 
with  one  general  and  one  or  more  dormant  partners,  forms 
the  type  of  business  organization  resembling  most  closely 
the  participation  associations  described  in  the  preceding 
section.  Dormant,  as  also  secret  and  ostensible  partners, 
are  not  very  common. 

Sphere  of  Activity.  —  As  the  partnership  rests  at  bottom 
upon  the  principles  of  common  law  which  are  of  general 
applicability  in  the  United  States,  the  members  of  any  such 
partnership  will  enjoy  generally  the  same  privileges  and 
obligations  in  any  of  the  several  states,  except  where  cer- 
tain statutory  provisions  may  have  made  minor  changes. 
Under  common  law  the  partners  also  are  by  no  means 
restricted  from  extending  or  contracting  their  sphere  of  ac- 
tivity, provided  that  they  confine  their  business  to  a  law- 
ful enterprise.  By  the  mere  formality  of  changing  the 
terms  of  the  agreement  they  may  widen  or  narrow  the  pur- 
pose of  their  business  enterprise,  or  change  its  nature  com- 
pletely, always,  of  course,  exercising  due  care  to  protect  the 
interests  of  their  creditors. 

Dissolution  or  Termination  of  the  Parnership.  —  Volun- 
tary dissolution  of  the  partnership  may  be  effected  by 
mutual  consent  of  the  partners  under  the  terms  of  the 
agreement  creating  it  and  under  the  conditions  outlined  in 
the  preceding  paragraph.  The  withdrawal  of  one  or  more 
partners  is  held  to  terminate  the  agreement  but  need  not 
necessarily  work  to  effect  a  general  liquidation  and  dis- 
continuance of  the  enterprise.  Provision  may  be  made  in 
the  agreement  for  such  contingencies,  which  will  preserve 
the  commercial  entity  of  the  business;  but  if  no  such  pro- 
vision is  made,  the  withdrawing  partners  can  insist  upon 
liquidation  of  the  assets. 

Dissolution  by  operation  of  law  ordinarily  results  from 
the  following  causes: 

(a)  Death  or  withdrawal  of  a  partner 


THE    PARTNERSHIP  65 

f^  Bankruptcy  of  a  partner  or  of  the  firm 

^(x:)- Marriage  of  a  female  partner 

(dj_  Where  the  business  has  become  illegal 

(e)  Alteration  of  the  firm's  property  or  interest 

(^Declaration  of  war  between  countries  when  the 
subjects  of  each  are  members  of  the  firm. 

In  brief,  any  act  or  event  that  goes  to  the  essence  of  the  Tf 
contract  creating  the  partnership,  is  held  to  work  its  disso- 
lution. But  here  also,  as  in  the  preceding  case,  provision 
may  often  be  made  for  the  continuance  of  the  business 
under  a  revised  agreement.  In  either  case,  however,  the 
original  partnership  would  be  dead;  revision  of  the  agree- 
ment resulting  merely  in  the  creation  of  a  new  partnership.  /. 

In  addition  to  the  two  methods  of  dissolution  given,  it 
frequently  happens  that  the  courts  are  appealed  to  to 
terminate  the  partnership  relation  by  decree  or  annulment, 
as  for  example  where  there  is  a  practical  impossibility  of 
success,  an  incapacity  of  the  parties  or  a  gross  misconduct 
on  the  part  of  a  partner. 

Termination  of  the  partnership,  naturally,  entails  a  gen- 
eral winding  up  of  the  firm's  affairs.  Creditors  must  be 
satisfied  and  the  rest  of  the  assets  distributed  among  the 
partners  according  to  the  terms  of  this  agreement.  Under 
provision  of  law  the  satisfaction  of  claims  against  the  part- 
nership assets  must  take  the  following  order: 

(a)  Payment  of  all  debts  and  obligations  of  third  parties 

(b)  Repayment  of  advances  made  by  partners  to  the 
firm 

(c)  Each  partner's  contributions  of  capital  to  the  firm 

(d)  Whatever  surplus  remains  is  distributed  according 
to  the  partnership  agreement. 

Classification  and  Types  of  Partnerships.  —  Partner- 
ships may  be  classified  according  to  the  nature  of  the 
business  to  be  undertaken,  the  extent  to  which  business 
operations  shall  be  carried,  and  the  nature  of  association. 


66       PERSONAL   OWNERSHIP    ORGANIZATIONS 

(a)  Nature  of  the  business.  —  Under  this  head  partner- 
ships  fall  into  two  geneml  classes,  trading  and  non-triiding. 
A  trading  partnership  is  one  in  which  the  business  transac- 
tions include  the  general  dealing  in  commodities,  as  by 
buying  and  selling  for  profit.  Non-trading  partnerships  are 
those  formed  for  the  joint  pursuit  of  some  employment  or 
occupation  such,  as.  tli£_4icactice-  of  law  or  medicine.  It  is 
the  former  that  have  been  under  consideration  in  this 
chapter.  The  non-trading  partnerships  follow  quite  gen- 
erally the  principles  laid  down,  but  in  many  instances  with 
minor  variations. 

(b)  Extent  of  operations.  —  Under  this  head_jgartner- 
ships  may  be  classed  as  universal,  general  or  special.  Uni- 
versal partnerships  are  those  in  which  the  partners,  agree 
to  combine  all  of  their  property,  skill,  labor,  etc.,  of  _eyerv_ 
description  in  the  enterprise.  They  are  practically  never 
used.  In  the  general  partnership  the  partners  agree  to 
join  in  all  transactions  of  a  particular  class  of  more  or  less 
permanency,  such  as  a  partnership  in  banking,  or  merchan- 
dising. They  mak;e  up  probably  the  great  bulk  of  trading 
partnerships.  Special  partnerships  are  association  agree- 
ments with  respect  to  a  single  venture  only,  such  as  a 
single  mercantile  transaction  or  the  charter  of  a  vessel  for 

_a^single  trip.  They  are  quite  common,  but  because  of  their 
temporary  nature  are  not  recognized  as  established  business 
enterprises,  being  rather  in  the  nature  of  joint  adventures 
on  the  one  hand,  and  participation  associations  on  the 
other. 

(c)  Nature  of  association.  —  This  classification  is  based 
upon  variations  in  the  principles  governing  the  liability  of 
partners,  power  to  transfer  their  interest,  power  of  with- 
drawal  and  the  like.  Thus  classified,  we  find  ordinary 
partnerships,  limited  partnerships,  partnership  associations, 
joint  stock  companies,  mining  partnerships  and  sub-part- 
nerships. 


THE    PARTNERSHIP  67 

1.  Ordinary  partnerships  are  those  in  which  the  partners 
and  third  parties  are  governed  by  the  principles  laid  down 
as  general  rules  in  the  preceding  paragraphs  of  this  section. 
They  rest  upon  the  rules  of  common  law  and  accepted  prac- 
tice. In  the  French  commercial  code  they  are  called 
societes  en  nom  collectif  and  in  the  German,  offene  Handels- 
gesellschaft. 

2.  Limited  partnerships  differ  from  the  general  type, 
heretofore  described,  in  that  the  liability  of  one  or  more  of 
the  partners  is  limited  to  the  sum  of  their  original  capital 
contributions,  but  at  least  one  partner  must  be  a  general 
partner  of  unlimited  liability.  The  general  partner  must  be 
actively  engaged  in  the  management  and  direction  of  the 
business,  but  no  such  rule  applies  generally  to  the  limited 
partners.  This  type  is  possible  of  adoption  in  the  United 
States  only  where  statutes  make  provision  for  it.  In 
Louisiana,  under  the  modified  French  code,  they  are  quite 
common.  While  nearly  all  states  make  some  provision 
for  them  they  do  not  enjoy  great  popularity  because  of 
the  relative  ease  with  which  a  corporation  may  be  formed. 
Ordinarily  under  the  laws  of  these  states  neither  the  limited 
nor  the  general  partners  may  freely  transfer  their  interest 
in  the  business  to  another.  The  French  code  treats  them 
under  the  name  of  societes  en  commandite  and  the  Ger- 
man under  Kommanditgesellshaft. 

3.  Partnership  associations.  —  In  Pennsylvania  and 
Michigan  the  statutes  provide  for  the  organization  of  part- 
nership associations.  Under  these  law's  all  of  the  partners 
have  limited  liability,  and  the  shares  of  interest  are  usually 
represented  by  stock  certiificates.  These  stock  certificates, 
however,  unlike  securities,  are  not  freely  transferable.  A 
person  acquiring  the  same  must  first  be  elected  to  member- 
ship, before  being  entitled  to  full  participation  in  the  busi- 
ness. If  he  fails  of  election  the  remaining  members  are 
empowered  to,  and  must  purchase  the  share  of  the  peti- 


68       PERSONAL   OWNERSHIP    ORGANIZATIONS 

tioner,  either  at  a  price  agreed  upon,  or  in  default  of  such 
agreement,  at  a  price  set  by  an  appraiser  appointed  by  the 
court.  As  a  prerequisite  to  organization  of  partnership 
associations,  the  articles  of  association  must  be  approved 
by  the  proper  state  official,  and  a  franchise  tax,  similar  to 
that  required  of  a  corporation,  must  be  paid.  The  word 
"  limited  "  must  also  appear  in  the  name  of  the  association. 
The  term  of  life  is  usually  limited  to  a  period  of  twenty 
years  with  privilege  of  renewal.  Although  quite  service- 
able in  the  state  authorizing  them,  they  are  unsatisfactory 
for  business  in  other  states  because  they  may  do  business 
there  only  by  sufferance  and  not  by  right,  as  a  consequence 
of  which  the  limited  liability  feature  may  not  be  recognized, 
and  they  must  be  treated  as  ordinary  partnerships  before 
the  law.  Because  of  their  close  resemblance  to  corpora- 
tions they  are  frequently  called  quasi-corporations. 

4.  Joint  stock  companies  are  primarily  partnerships 
whose  capital  is  divided  into  freely  transferable  shares 
represented  by  stock  certificates  of  the  security  type.  They 
are  reserved  for  further  treatment  under  a  following  sec- 
tion  devoted  to  securities-issuing  organiza,tions, 

5.  Mining  partnerships  are  modified  forms  of  the  general 
partnership  that  have  arisen  out  of  customary  practices 
that  arose  in  the  early  mining  districts  for  the  exploitation 
of  mining  claims  in  common  by  two  or  more  persons. 
There  is^usually  no  fixed  agreement^  the  partners^  simply 

_working  in  common  and  sharing,  .equally. -ill. -tlifi-_piiafits. 
Substitution  of  partners  may  be  effected  at  will,  without 
dissolving  the  partnership.  For  this  reason  also,  the  death 
of  any  partner  does  not  work  the  dissolution  of  the  firm, 
provided  there  are  more  than  two  members. 

6.  Sub -partner ships  arise  where  one  partner  enters  into_ 
an  agreement  with  a  Third  person  to  share  as  partner  in 
his  part  of  the  profits  and  losses  of  the  original  partner- 
ship.   They  are  notjvery_cpmmon^ 


THE    PARTNERSHIP  69 

7.  Joint  adventures  are  partnership  organizations  that 
have  for  their  purpose  the  conduct  and  conclusion  of  a 
single  business  venture.  The  terms  of  the  agreement  de- 
termine the  nature  of  the  venture  and  the  number,  rights, 
obligations  and  privileges  of  the  members.  In  all  of  these 
particulars  they  resemble  very  closely  the  participation 
association;  but  on  the  question  of  liability  of  members 
toward  third  parties  they  differ  from  it.  The  liability  of 
co-adventurers  is  equal,  and  as  to  third  parties  is  un- 
limited, being  entirely  independent  of  the  amount  ad- 
vanced. Their  duration  is  limited  to  such  a  period  of  time 
as  is  necessary  to  complete  the  contemplated  transaction. 

8.  Underwriting  syndicates  are  a  type  of  partnership 
that  have  as  their  object  a  single  undertaking,  namely, 
of  assuring  to  the  issuing  organization  a  market  for  a  defi- 
nite amount  of  securities,  at  a  predetermined  price  per 
share.  Their  work  is  of  a  financial  character,  in  so  far 
as  they  confine  their  operations  quite  largely  to  the  con- 
version of  securities  capital  into  money  capital,  and  make 
their  profit  or  loss  out  of  such  transactions.  They  render 
invaluable  service  to  large  corporations  and  combinations 
by  assuring  them  of  sufficient  funds  to  carry  through  their 
proposed  undertakings.^  Concerning  the  nature  of  the  lia- 
bility of  members  of  such  syndicates,  one  authority  says: 
"  The  members  of  a  syndicate  would  undoubtedly  be  held 
liable  to  third  parties  as  partners  if  the  enterprise  became 
absolutely  insolvent.  As  most  syndicates  are  formed  for 
financial  investments  or  underwritings,  and  either  involve 
no  obligation  in  excess  of  the  amounts  contributed,  or,  if 
otherwise,  have  well-defined  and  well-understood  liability 
as  to  the  syndicate  transactions,  and  as  the  members  of 
such  syndicates  are  usually  men  or  concerns  of  wealth  and 
standing,  the  question  of  partnership  liability  rarely  arises. 

3  A  brief  description  of  the  procedure  of  the  underwriting  opera- 
tion will  be  found  in  W.  H.  Lough's  Corporation  Finance. 


70       PERSONAL   OWNERSHIP   ORGANIZATIONS 

If  there  were  any  danger  of  such  liability  it  could  probably 
be  avoided  by  organization  under  a  trust  with  express  ex- 
clusion or  individual  liability."  * 

Extent  of  Use.  —  Although  no  reliable  information  is 
available  to  show  the  number  of  partnerships  actively  en- 
gaged in  business  in  this  country,  nevertheless  sufl&cient 
statistics  have  been  published  to  indicate  the  relative  im- 
portance of  this  type  of  ownership  as  a  business  vehicle, 
and  also  to  show,  in  a  general  way,  in  what  fields  of  busi- 
ness it  is  most  frequently  employed. 

The  great  obstacle  standing  in  the  way  of  ascertaining 
the  number  of  partnerships  compared  with  other  types  of 
entrepreneurial  organization,  is  the  intangible  character 
of  those  types,  which  in  continental  Europe  would  more 
properly  be  classed  as  participation  associations,  but  here 
are  at  law,  partnerships.  The  temporary  character  of  these 
organizations,  having  as  their  object  only  a  single  business 
venture,  makes  enumeration  impossible,  except  in  such 
fields  of  enterprise  as  manufacturing,  where  a  more  perma- 
nent establishment  is  the  rule.  Figures  published  in  the 
Statistical  Abstract  of  the  United  States  give  the  number  of 
manufacturing  establishments  operated  as  partnerships  at 
about  62,600  in  1899,  54,000  in  1909  and  51,000  in  1914. 
The  percentage  of  all  manufacturing  establishments  that 
these  made  up  was  22.9  in  1899,  20.2  in  1909  and  18.2  in 
1914.  But  the  importance  of  the  partnership  in  this  in- 
dustrial field  is  overemphasized  when  number  alone  is 
taken  into  account.  The  value  of  the  product  of  the  above 
manufacturing  establishments  conducted  as  partnerships 
was  only  19.0  per  cent  in  1899,  10.6  per  cent  in  1909  and 
only  about  8.2  per  cent  in  1914.  A  glance  at  the  table 
(page  88)  showing  sources  of  income  from  three  types 
of  business  organization  for  1917  is  also  instructive.    Only 

■*  Conyngton,  Thos.,  Corporate  Organization  and  Management. 
p.  519. 


r 


THE    PARTNERSHIP  71 

13.7  per  cent  of  the  total  net  income  from  individual  busi- 
ness, from  partnerships  and  from  dividends  of  corpora- 
tions is  credited  to  partnerships.  Considerable  variation 
in  the  proportion  of  income  from  these  three  sources  derived 
from  partnerships  is  also  shown.  In  the  agricultural  states 
it  is  relatively  low,  while  in  the  industrial  states  it  tends 
to  be  much  higher.  Thus,  in  Iowa  it  is  6.9  per  cent  while 
in  New  York  it  is  19.1  per  cent. 

Several  conclusions  may  be  drawn  from  these  statistics. 
First,  that  the  partnership  form  of  ownership  organization 
is  rapidly  losing  its  importance  in  business,  and  second, 
that  there  must  be  certain  inherent  and  contributing  causes 
for  this  decline. 

jmitatjatt-oi-tlie  Partnership,  t:^  Among  the  causes  for 
the  decline  of  the  partnership  are  certain  of  its  inherent 
characteristics  such  as  the  following: 

(a)  Unlimited  liability, 

(6)  Numerous  uncontrollable  events  that  affect  its  dis- 
solution, 

(c)  Obstacles  in  the  way  of  free  transfer  by  partners  of 
their  interest  in  the  business, 

(d)  Difficulty  of  securing  harmony  and  unity  of  purpose 
in  management,  and 

(e)  Natural  limitation  on  expansion  because  of  limited 
ource  of  capital. 

The  last  mentioned  characteristic  was  not  of  any  great 
consequence  until  the  period  of  big  business  set  in.  But 
with  its  advent  came  an  ever  increasing  demand  for  capi- 
tal to  be  used  in  expanding  business  enterprises  in  the 
financial,  transportation,  mining,  trade  and  manufacturing 
fields.  To  meet  such  growing  capital  requirements  de- 
mands great  elasticity  in  the  ownership  organization. 
This  the  partnership  does  not  possess,  and  in  consequence, 
it  gave  way  to  the  more  flexible  and  more  serviceable 
corporation. 


72       PERSONAL  OWNERSHIP   ORGANIZATIONS 

But  the  partnership  also  has  several  desirable  qualities 
which  are  very  serviceable  in  business  enterprise.  Among 
these  should  be  mentioned  (a)  the  ease  with  which  it  may 
be  formed,  (6)  absence  of  restrictions  on  its  sphere  of  ac- 
tivity, thus  permitting  of  change  from  one  type  of  business 
to  another  or  of  expansion  into  other  fields  more  or  less  at 
will,  (c)  relative  freedom  from  state  regulation  and  con- 
trol, and  (d)  the  promptness  with  which  it  can  act. 
Through  attempts  to  conserve  the  advantages  and  to  avoid 
the  limitations,  various  modifications  of  the  partnership 
have  from  time  to  time  been  made.  Out  of  such  attempts 
arose  the  joint  stock  company,  the  partnership  association 
and  several  of  the  types  of  limited  partnership  above 
described.  Under  these  modified  forms  it  has  been  possible 
to  employ  it  to  operate  very  large  enterprises.  Thus,  the 
Carnegie  Steel  Company  was  at  one  time  operated  as  a 
partnership  and  the  great  "  Iron  Master  "  is  reported  to 
have  said  that,  while  operating  under  this  form  his  concern 
could  play  all  around  his  competitors.  Most  of  these  modi- 
fications follow  the  principle  of  making  the  partnership 
more  durable  by  eliminating  most  of  the  causes  of  dis- 
solution, and  by  providing  for  greater  latitude  in  the  trans- 
ferability of  interest.  But  even  with  these  alterations  it 
still  lacks  much  of  attaining  the  serviceability  of  the  corpo- 
ration. A  German  example  of  this  is  reported  by  Robert 
Liefmann.^  It  appears  that  many  of  the  coal  mines 
in  the  Ruhr  district,  early  in  the  last  century,  were 
operated  under  a  form  of  partnership  called  Teilhabershaft, 
which  is  characterized  by  permanent  duration  and  free 
transferability,  either  in  whole  or  in  part,  of  such  interest 
as  a  shareholder  might  possess.  Even  as  late  as  1865,  by 
the  splitting  up  of  the  original  shares  through  sale,  inherit- 
ance and  transfer,  a  single  share  in  the  ownership  of  this 

5  R.  Liefmann,  Beteiligungs  und  Finanzierungsgesellschaften,  Jena, 
1913.    Pp.  40,  41. 


THE    PARTNERSHIP  73 

concei'n  was  represented  by  a  fraction  whose  numerator 
consisted  of  47  digits  and  the  denominator  of  48.  Others 
with  35,  30,  and  26  digits  in  the  numerator  are  also  men- 
tioned. One  can  imagine  the  poor  bookkeeper,  as  he  sweats 
over  the  distribution  of  net  earnings  to  the  holders  of  such 
shares.  Others,  again,  prohibited  the  splitting  up  of  shares, 
but  permitted  unrestricted  transfers.  This  plan  also  had  its 
disadvantages;  for,  as  the  business  grew  the  shares  became 
more  valuable.  Single  shares  of  this  type  are  reported  to 
have  attained  a  money  value  of  about  $14,000,  which,  of 
itself,  would  make  it  difficult  to  sell  them. 

After  all,  it  appears  that  nothing  short  of  a  full  use  of 
securities  as  instruments  of  organization  to  represent  the 
participants'  interest  in  the  business  can  provide  an  owner- 
ship form  under  which  a  modern  large-scale  business  enter- 
prise can  be  satisfactorily  set  up  and  operated.  This  the 
partnership  does  not  offer.  In  fact,  none  of  the  personal 
ownership  organizations  is  adaptable  to  big  business  under- 
takings ;  but  for  small  enterprises  in  manufacture,  trade,  the 
professions,  agriculture  and  finance  they  offer  many  ad- 
>^antages,  and  there  they  find  their  greatest  usefulness. 


PART  III 

Securities-Issuing  Organizations 


CHAPTER  V 

THE   NATURE   OF   SECURITIES 

The  types  of  entrepreneurial  or  ownership  organization 
thus  far  considered,  all  have  one  outstanding  character- 
istic—  they  are  inseparable  from  the  person  of  the  owner. 
Any  person  enjoying  the  relationship  of  owner,  or  entrepre- 
neur, in  any  one  of  them  can  lay  claim,  either  in  whole  or 
in  part,  to  the  assets  of  the  business;  and  furthermore, 
he  can  withdraw,  dispose  of,  or  hypothecate  his  share  at 
will  at  any  time.  But  this  fact  should  be  noted:  In  with- 
drawing from  the  business,  he  spontaneously  causes  the 
dissolution  of  the  organization.  This  must  be  so,  because, 
at  law,  the  ownership  of  the  assets  is  vested  directly  in 
the  person  of  the  proprietor  or  partner,  and  the  share  thereof 
that  he  owns  goes  with  him  when  he  severs  his  connection 
with  the  business.  Of  course,  he  may  agree  to  accept  the 
money  equivalent  in  lieu  of  the  part  of  the  business  plant 
and  equipment  that  belongs  to  him;  but  the  fact  that  he 
has  a  legal  right  to  withdraw  his  share  of  the  assets  of  the 
business  cannot  be  overlooked.  The  personal  element  in 
these  organizations,  therefore,  is  predominant.  It  is  this 
characteristic  that  distinguishes  them  most  clearly  from 
the  securities-issuing  or  impersonal  types,  represented  by  the 
corporation,  the  joint  stock  company,  and  the  securities- 
issuing  trust. 

Theory  of  Impersonal  Organization.  —  The  theory  of 
impersonal  organization  is  more  easily  understood  if  we 
have  clearly  in  mind  the  purpose  that  it  seeks  to  accomplish. 
Let  us  assume,  for  example,  that  we  have  before  us  a  small 
steel  plant  operating  under  a  personal  ownership  organi- 

77 


78       SECURITIES-ISSUING    ORGANIZATIONS 

zation  of  the  partnership  type..  Legally  this  organization  is 
a  condition,  an  agreement  between  persons,  and  not  a 
thing  or  an  ownership  unit.  The  several  partners  have 
merely  agreed  to  combine  their  personally  owned  plants 
and  equipment  for  a  business  purpose.  One  of  them  now 
desires  to  withdraw. 

There  are  four  ways  by  which  this  may  be  accomplished. 
In  the  first  place,  the  withdrawing  partner  would  probably 
make  an  offer  to  the  remaining  partners  to  buy  his  share. 
If  they  are  in  a  position  to  accept  such  an  offer  and  act 
upon  it,  the  result  of  the  transaction  would  be  to  force 
them,  perhaps  unwillingly,  to  invest  more  capital  in  the 
business  than  they  had  originally  contemplated.  If,  how- 
ever, they  do  not  have  available  sufficient  funds  to  buy 
him  out,  he  may  adopt  the  second  plan,  namely,  to  sell 
his  share  in  the  business  to  a  third  person.  This  places 
upon  him  the  burden  of  finding  a  buyer  who  is  willing  to 
take  his  place  in  the  partnership  —  by  no  means  an  easy 
task.  It  would  require  a  complete  survey  of  the  plant  and 
equipment  to  ascertain  its  condition  and  value,  a  careful  in- 
spection of  the  books  and  accounts  to  determine  net  assets, 
profits,  etc.,  and  the  drafting  of  a  bill  of  sale  conveying 
personal  property  and  perhaps  also  real  estate  —  in  all,  a 
mass  of  laborious  details  not  only  time  consiuning  but  also 
costly.  Upon  the  other  partners  would  then  fall  the  obli- 
gation of  reconstituting  the  organization  in  order  to  take 
in  the  purchaser  who  may  be  a  total  stranger  to  them, 
and,  in  addition,  might  prove  to  be  incompatible.  If  no 
one  can  be  found  to  buy  the  share  of  the  withdrawing  part- 
ner, he  may  propose  the  third  plan  —  that  of  actually  tak- 
ing away  from  partnership  control  such  part  of  the  physi- 
cal property,  cash  and  accounts  as  may  be  agreed  upon. 
This  course  naturally  destroys  the  ownership  entity  of  the 
plant.  If  all  parties  decide  to  continue  to  operate,  we  then 
have  two  distinct  business  establishments,  neither  legally 


THE    NATURE    OF    SECURITIES  79 

dependent  upon,  nor  in  any  wise  controlled  by  the  other, 
except  in  so  far  as  may  be  dictated  by  economic  expediency 
such  as  the  necessity  for  maintaining  the  economic  unity  of 
the  plant.  Aside  from  the  difficulty  of  arriving  at  an 
equitable  basis  for  the  division  of  the  property,  this  method 
of  withdrawal  obviously  has  another  equally  serious  draw- 
back. If  it  so  happens  that  one  part  of  the  plant  cannot 
operate  without  the  other,  and  each  part  is  under  the  con- 
trol and  ownership  of  a  separate  and  distinct  business 
organization,  the  difficulties  arising  from  an  attempt  to  op- 
erate the  plant  under  such  conditions  would  doubtless  prove 
insurmountable.  There  would,  then,  remain  only  one 
other  course,  namely,  to  liquidate  the  whole  business,  sell 
it  intact,  as  a  going  concern,  or  piecemeal,  at  a  great  sacri- 
fice. Thus,  under  such  conditions,  the  partners  might  all 
be  forced,  willingly  or  unwillingly,  to  discontinue  the 
business. 

The  rigidity  of  investments,  particularly  in  enterprises  of 
this  character,  is  well  indicated  in  the  above  example.  Cap- 
ital once  put  into  a  business  plant  and  equipment,  except 
under  favorable  conditions  resulting  from  a  phenomenal 
rise  in  prices,  cannot  again  be  fully  recovered  by  the  sale 
of  the  original  equipment.  That  must  be  operated  at  a 
profit,  which,  over  a  period  of  years,  will  be  sufficient  to 
replace  the  equipment  as  it  wears  out.  Otherwise  it  is  an 
economic  loss  falling  most  heavily  upon  the  individual  who 
owTis  the  plant.  This  rigidity  is  greatly  magnified  by  the 
many  obstacles  that  stand  in  the  way  of  the  free  sale  and 
transfer  by  an  owner  of  his  interest  in  such  an  establish- 
ment, wherever  it  is  operated  under  the  personal  ownership 
type  of  organization.  It  is  also  to  be  noted  that  these  diflB- 
culties  grow  steadily  greater  with  the  size  of  the  establish- 
ment. While  one  may  find  ten  buyers  for  a  share  in  a 
small  business,  considerable  difficulty  might  be  encountered 
in  finding  one,  if  it  is  a  large  business.     Thus,  the  number 


80       SECURITIES-ISSUING    ORGANIZATIONS 

of  persons  who  might  be  looked  to  as  possible  investors  in 
personally  owned  establishments,  is  ordinarily  quite  small. 
They  can  draw  their  funds  at  best,  from  perhaps  a  score  of 
persons  who  must  be  more  or  less  closely  acquainted,  but 
the  gateways  that  tap  the  vast  reservoir  of  national  capital 
surplus,  closely  held  by  millions  of  persons,  are  uncom- 
promisingly closed  against  them. 

The  purpose  to  be  attained  by  the  impersonal  types  of 
entrepreneurial  organizations  may,  then,  be  said  to  be  two- 
fold, first  to  facilitate  the  transferability  of  the  ownership 
interest  in  business,  and  secondly,  to  make  available  to 
business  enterprises  the  capital  surplus  of  the  world.  The 
instruments  that  they  employ  to  accomplish  this  purpose 
are  securities. 

Securities  Are  a  Class  of  Commercial  Paper. — The  term 
"commercial  paper"  comprises  all  credit  instruments,  other 
than  currency,  that  give  the  bona-fide  holder  a  claim  on  cap- 
ital. These  instruments  fall  chiefly  into  three  general 
classes,  namely,  (1)  money  paper,  more  commonly  called 
negotiable  instruments,  which  include  checks,  drafts  and 
bills  of  exchange,  notes  and  the  like,  (2)  commodity  paper, 
such  as  warehouse  receipts,  bills  of  lading,  etc.,  and  (3)  in- 
vestment paper,  including  mortgages,  bonds,  stock  and 
trust  certificates,  etc.  The  distinction,  as  based  upon 
economic  principles,  lies  in  the  fact  that  the  claim  of  a 
holder  of  money  paper  is  a  claim  on  a  definite  sum  of  money 
to  be  paid  at  a  definite  time,  while  that  of  the  holder  of 
investment  paper  is  a  direct  claim  upon  the  income  from  a 
definitely  designated  accumulation  of  capital,  and  a  de- 
ferred claim  upon  such  capital  itself. 

Money  Paper.  —  The  chief  use  of  money  paper  is  to 
facilitate  the  transfer  of,  and  dealing  in  money,  by  effect- 
ing a  great  economy  in  the  use  of  real  money,  in  that  it 
becomes,  as  it  were,  a  substitute  for  the  latter  in  most  trade 
transactions.      Checks,    drafts    and    personal    notes,    etc., 


THE    NATURE    OF    SECURITIES  81 

arose  and  developed  under  an  industrial  system  whose  out- 
standing characteristic  was  personal  ownership  of  the 
business  establishment.  We  find  some  forms  of  this  type 
of  instrument  were  in  use  long  before  the  dawn  of  the 
Christian  era  in  Phoenicia  and  Babylon.  They  are  service- 
able alike  to  any  system  of  ownership  organization  that  is 
based  upon  private  property.  But  this  should  be  noted: 
They  do  not  influence,  to  any  measurable  degree,  the  dis- 
tribution of  income,  and  consequently  they  work  no  notice- 
able change  in  industrial  organization,  neither  do  they 
establish  any  new  principle  of  organization  of  business 
ownership. 

Commodity  Paper.  —  This  class  of  commercial  paper 
represents  merely  the  ownership  interest  in  the  wares  of 
commerce  that  are  stored  in  warehouses  or  are  in  course 
of  transportation  by  a  common  carrier.  They,  in  no  way, 
are  instruments  of  ownership  organization. 

Investment  Paper.  —  Money  paper,  it  is  at  once  seen, 
represents  in  no  way  a  claim  upon  the  income  of  capital. 
This  is  primarily  what  distinguishes  it  from  investment 
paper.  Through  the  use  of  the  latter  it  becomes  possible  so 
to  construct  an  ownership  organization  in  business,  that 
those  who  have  invested  money  in  it  may  more  or  less 
freely  withdraw  from  the  undertaking  without  affecting 
the  entity  of  the  organization.  The  business  itself,  through 
the  use  of  these  instruments,  can  have  an  economic,  as  well 
as  a  legal  entity,  separate  and  apart  from  the  person  or 
persons  who  invest  in  it.  In  the  more  highly  developed 
forms  this  principle  may  be  carried  so  far  that  any  owner, 
or  investor,  risks  in  the  undertaking  no  more  than  what  he 
agrees  to  contribute ;  and  he  is  free  at  any  time  to  transfer 
his  share  in  the  business  to  whomever  he  may  see  fit,  re- 
gardless of  whether  this  may  please  or  displease  other  in- 
vestors or  owners  in  the  same  business.  Also,  if  any  man 
does  not  wish  to  risk  all  of  his  capital  in  a  single  enterprise, 


82       SECURITIES-ISSUING    ORGANIZATIONS 

he  may  purchase  the  investment  paper  of  a  number  of  busi- 
ness estabhshments,  and  by  this  means  iron  out  the  in- 
equahties  of  return  from  the  various  enterprises  in  which  he 
is  interested,  in  such  a  way  as  to  bring  him  a  fairly  well 
assured  and  dependable  income,  even  though  he  may  give  no 
attention  and  devote  no  time,  whatever,  to  the  affairs  of 
the  undertakings  in  which  he  is  financially  interested. 
Investment  paper,  then,  does  influence  the  distribution  of 
income,  and  it  may  effect  a  change  in  the  ownership  organi- 
zation. 

However,  not  all  investment  paper  affords  the  same  free- 
dom and  flexibility  of  organization  above  indicated.  The 
impersonal  status  of  the  organization,  may  be  made  little 
short  of  absolute  through  the  use  of  certain  types  of  invest- 
ment paper,  while  others  will  produce  little  appreciable 
change  in  the  personal  ownership  of  the  organization. 
Some  types  of  investment  papers  may  be  freely  transferred, 
sold  and  traded  in,  with  scarcely  any  formality  attendant 
upon  such  transactions;  while  others  require  more  formal- 
ity and  special  bargaining  on  the  price  of  each  piece  sold. 
Again,  we  find  that  certain  kinds  represent  a  share  in  the 
ownership  of  the  enterprise,  while  others  represent  a  cred- 
itor's interest  in  the  business  with  the  principal  secured 
by  its  assets.  The  following  table  will  aid  in  understand- 
ing the  general  classification  of  investment  papers  that  will 
be  employed  in  this  text. 


THE    NATURE    OF    SECURITIES 


83 


Classified  as  representing 

Investment  paper 

(a)   Ownersliip  in 
the  business 

(fe)   Creditor's  interest 
in  the  business 

Classified  as  to  transferabil- 
ity: 

1.  Non-securities     (re- 
stricted)   

2.  Securities      (unrestrict- 
ed)   

Shares ' 

f  Stocks 

\  Trust  certificates 

Mortgages 

f  Bonds 
\  Notes 

1  English  practice  reverses  the  order,    considering  stocks    as    non- 
securities. 


Ownership  Paper.  —  Each  instrument  of  the  ownership 
group  represents  a  fractional  part  of  the  business.  This 
may  be  expressed  in  terms  of  money,  for  instance,  by 
arbitrarily  assigning  a  fixed  sum  as  the  capital  of  the  busi- 
ness for  this  purpose,  and  then  making  each  share  a  frac- 
tional part  of  this  sum ;  or  no  money  value  may  be  employed 
at  all,  in  which  case  the  capital  is  simply  stated  as  so 
many  shares.  In  other  words,  each  instrument  may  give 
the  holder  a  one-thousandth  part  of  the  ownership  interest 
in  the  business  without  the  assignment  of  a  value  to  it,  or 
it  may  give  him  a  one-thousandth  part  of  an  ownership  cap- 
ital set  at  $100,000,  in  which  case  each  unit  would  have  an 
assumed  value  of  $100.  Such  instruments,  whether  with  or 
without  an  assigned  value,  entitle  the  holder  to  share  in 
the  net  income  of  the  business  and  usually  to  a  voice  in  its 
control  and  direction  and  to  a  share  in  the  assets  in  case  of 
dissolution,  and  place  upon  him  the  ownership  obligation  of 
risk,  or  liability  of  loss  which  may  or  may  not  be  limited. 
Another  important  characteristic  of  this  group  is  their  per- 
manence. Ordinarily  once  having  been  issued  they  are  not 
redeemable  or  revokable,  but  remain  a  standing  obligation 


84        SECURITIES-ISSUING    ORGANIZATIONS 

against  the  business  as  long  as  the  organization  that  oper- 
ates it  endures. 

Creditor  Paper.  —  The  instruments  of  group  {b)  are  like 
those  of  the  group  just  described  in  so  far  as  they  are  based 
on  a  claim  on  income  and  assets.  But  even  in  this,  as  well 
as  in  other  respects,  they  exhibit  clearly  recognizable 
differences.  In  the  first  place,  they  represent  a  money 
loan,  and  consequently  each  unit  is  a  fractional  part  of  a 
sum  of  money  that  is  due  and  payable  at  a  definite  time. 
The  claim  on  income  is  usually  limited  to  a  fixed  per  cent 
and  ordinarily,  does  not  fluctuate  with  the  varying  prosper- 
ity of  the  business.  As  the  creditors  of  the  business  must  be 
satisfied  before  there  is  a  net  profit  to  be  distributed  to  the 
owners,  this  claim  on  income  attached  to  creditors'  invest- 
ment paper  takes  precedence  over  that  of  ownership  paper. 
The  creditor  group,  moreover,  ordinarily  gives  to  the  holder 
no  right  to  a  voice  in  the  management  of  the  business  so 
long  as  the  claim  on  income  is  satisfied.  The  claim  on 
assets,  that  it  carries  with  it,  is  in  the  nature  of  a  deferred 
claim,  contingent  for  effectiveness  upon  the  actual  failure 
to  satisfy  the  current  claim  on  income,  or  the  inability  of 
the  issuing  organization  to  pay  in  full  the  principal  of  the 
loan  at  the  time  of  its  maturity.  These  instruments,  thus, 
are  redeemable  at  a  definite  date  and  are  not  permanent 
rights  of  participation  in  the  enterprise. 

The  horizontal  classification  is  based  on  transferability, 
that  is  to  say,  on  the  right  of  the  original  holder  to  sell,  or 
otherwise  dispose  of,  the  instrument  to  another.  When 
considered  from  this  angle  investment  papers  fall  into  two 
groups,  namely,  (1)  non-securities,  which  include  shares 
and  mortgages,  and  (2)  securities,  which  include  stocks, 
trust  certificates,  bonds  and  notes. 

Non-securities.  —  Non-securities  arc  investment  papers 
characterized  by  their  individuality.  They  occur,  usually, 
as  single  instruments,  and  but  infrequently  in  multiples  of 


THE    NATURE    OF    SECURITIES  85 

like  ones.  As  uniformity  of  denomination  and  value  is  the 
exception,  each  single  unit  is  not  freely  interchangeable  with 
every  other  unit  of  the  same  issue.  Because  of  this  lack  of 
standardization  and  interchangeability  of  one  unit  with  an- 
other, their  transfer,  or  sale,  from  person  to  person,  must 
ordinarily  be  accomplished  through  direct  bargaining  be- 
tween buyer  or  seller,  or  their  agents,  —  the  selling  price 
being  agreed  upon  only  after  a  careful  analysis  of  the  earn- 
ing power  or  value  of  the  economic  capital  back  of  each 
individual  unit.  For  this  reason,  there  exists  no  established 
permanent  market  where  daily  sales  take  place,  and  where 
the  prices  offered  and  asked  may  be  ascertained  from  hour 
to  hour,  and  day  to  day.  Under  these  circumstances,  trad- 
ing in  them  cannot  be  conducted  with  such  ease  and  facility 
as  to  characterize  them  as  freely  transferable.  The  chief 
use  that  is  made  of  them  is  to  render  the  capital  invested 
in  business  enterprises  conducted  under  personal  ownership 
organizations,  somewhat  more  mobile  than  would  be  the 
case  without  them. 

Non-security  investment  paper  is  now  not  widely  used 
as  an  instrument  of  organization  largely  because  of  the 
greater  advantages  offered  by  the  more  serviceable  securi- 
ties. Perhaps  the  best  example  of  the  use  of  non-security 
ownership  paper  is  found  in  the  limitedly  transferable  shares 
of  the  partnership  associations  of  this  country  and  England, 
and  the  Teilhaberschaften  of  Germany,  both  of  which 
already  have  been  explained.-  The  credit  paper  of  this  class 
consists  of  simple  mortgages  and  other  interest-bearing  evi- 
dences of  indebtedness  that  are  especially  secured  by  the 
assets  of  the  business  enterprise  and  the  non-business 
property  of  the  entrepreneurs.  At  its  best,  the  non-security 
investment  paper  can  exert  but  a  moderate  influence  in 
shaping  the  forms  of  ownership  organization. 

Securities.  —  Securities,  aside  from  incorporating  in  them- 

2  See  partnership  associations  in  Chapter  IV. 


86       SECURITIES-ISSUING    ORGANIZATIONS 

selves  the  claim  on  income  and  assets,  common  to  all 
investment  papers,  possess  all  of  those  qualities  that  have 
been  mentioned  as  not  possessed  by  non-securities,  namely, 
existence  in  large  numbers  of  like  kind  and  like  units,  com- 
plete interchangeability  of  one  unit  for  any  other  of  a 
given  issue,  and  unrestricted  transferability.  When  they 
represent  ownership  interest  they  are  stocks  (shares  of 
stock) ,  or  trust  shares,  and  when  a  loan  or  an  extension  of 
credit,  they  are  bonds  or  impersonal  notes.  It  must  be 
acknowledged,  however,  that  in  so  far  as  the  business  or- 
ganization is  distinct  from  the  entrepreneur  who  owns  its 
securities,  both  stocks  and  bonds,  when  viewed  strictly 
from  the  accounting  standpoint,  represent  credit  extended 
to  the  business  organization;  and  also  that  the  distinction 
between  the  ownership  and  credit  factors,  when  measured 
by  the  extent  of  control  exercised  by  the  owner  of  the  se- 
curities, tends  to  lose  its  definiteness  and  presents  the  as- 
pect of  a  gradual  transition  from  one  to  another.  These 
characteristics,  however,  will  be  more  fully  explained  in  the 
following  chapter  on  Corporate  Securities. 

Extent  of  the  Use  of  Securities.  —  The  issuance  of 
securities  for  business  and  public  use,  has  become  very 
widespread.  As  the  capital  concept  of  the  peoples  of  the 
world  has  become  extended  to  give  recognition  and  legal 
acceptance  to  these  instruments  of  organization,  govern- 
ments, as  well  as  business  men,  have  not  been  slow  in  avail- 
ing themselves  of  the  advantages  that  they  offer.  Some  idea 
of  the  extent  to  which  the  use  of  securities  has  spread 
throughout  the  world  may  be  gained  from  the  following 
table  compiled  by  the  "  Moniteur  des  Interets  Materiels  " 
of  Brussels  ^  which  shows  in  millions  of  francs  the  securi- 
ties issued  by  some  thirty  countries  during  the  years  1909, 
1910,  and  1911. 

3  Taken  from  R.  Liefmann,  Beteiligungs-und  Finanzierungsge- 
sellschajten,  p.  36. 


THE    NATURE    OF    SECURITIES 


87 


Country 


In  millions  of  Francs 


1909 


1910 


Austria  Hungary 

Belgium 

Belgian  Kongo 

Bulgaria 

Canada 

China 

Denmark 

Egypt 

France 

Germany 

Greece 

Italy 

Japan 

Latin  America 

Luxemburg 

Morocco 

Netherlands 

Norway 

Persia 

Portugal 

Roumania 

Russia 

Serbia 

South  African  Union 

Spain 

Sweden 

Switzerland 

Turkey 

United  Kingdom . . .  . 
United  States 


446 

448 

142 

918 

35 

77 

37 

1727 

3748 

7 

218 

231 

1455 

150 

247 
10 
15 

164 

55 

2060 

138 

284 

61 

436 

244 

2863 

8000 


955 
446 

119 

1257 

53 

162 

59 

1753 

2996 

466 

439 
1632 
3862 

98 

252 

57 

45 

2 

260 

1082 

198 

127 

113 

139 

258 

259 

3721 

5661 


927 

418 

298 

12 

1037 

212 

42 

14 

1332 

2771 

138 

154 

140 

2724 

17 

410 
85 
33 

87 

77 

1466 

345 

235 

306 

50 

240 

189 

1975 

4055 


This  table  shows  very  clearly  how  the  use  of  securities  in 
business  organization  has  spread  even  to  the  most  backward 
countries,  such  as  Persia  and  Turkey,  and  is  a  factor  to  be 
reckoned  with  the  world  over. 

The  extent  to  which  the  use  of  securities  in  business  has 
progressed  is  admirably  shown  by  the  report  of  the  Commis- 
sioner of  Internal  Revenue  presenting  statistics  of  income 


88       SECURITIES-ISSUING    ORGANIZATIONS 

compiled  from  the  income  tax  reports  for  the  year  1917.  The 
report  classifies  income  from  business  according  to  the 
nature  of  the  entrepreneurial  organization  into  three  classes, 
namely,  that  derived  from  individual  business  undertakings, 
from  partnerships  and  from  ownership  securities  or  stocks. 
A  tabular  summary  of  the  amount  and  per  cent  of  income 
from  these  several  sources,  for  some  representative  states 
and  the  United  States  as  a  whole  follows. 


Sources  of  Income  from  Business  for  some  Representative 
States  and  the  United  States  as  Shown  by  Income  Tax 
Returns  for  1917 

(Amounts  given  in  millions  of  dollars) 


state 


California..  .  . 

Colorado 

Georgia 

Illinois 

Iowa 

Louisiana .... 
Maryland .... 
Massachusetts 
Minnesota.  .  . 
Pennsylvania . 
New  Jersey .  . 
New  York .  .  . 
Washington . . 

United  States. 


From  individual 
business 


Amount  Percent 


155 
38 
40 

231 

160 
32 
39 

102 
77 

237 
82 

339 
46 

2865 


57.6 
62.3 
64.5 
56.8 
84.6 
59.3 
44.3 
29.0 
64.2 
42.8 
47.1 
37.7 
68.7 

50.9 


From 
partnerships 


From  corpora- 
tion dividends 


Amount  Percent  Amount  Percent 


37 

13.8 

7 

11.5 

9 

14.5 

47 

11.5 

13 

6.9 

10 

18.5 

15 

17.1 

50 

14.2 

12 

10.0 

79 

14.3 

20 

11.5 

205 

19.1 

7 

10.4 

775 

13.7 

77 
16 
13 

129 
16 
12 
34 

200 
31 

238 
72 

527 
14 

1992 


28.6 
26.2 
21.0 
31.7 
8.5 
22.2 
38.6 
56.8 
25.8 
42.9 
41.4 
49.2 
20.9 

35.4 


Total 
from 
all  these 
sources 


269 

61 

62 

407 

189 

54 

88 

352 

120 

554 

174 

1071 

67 

5632 


It  is  to  be  noted,  that  while  the  returns  indicate  that 
35.4  per  cent  of  all  income  from  business  for  the  United 
States  as  a  whole  came  from  dividends  of  corporations, 


THE    NATURE    OF    SECURITIES 


89 


nevertheless,  great  variations  in  percentages  are  found 
among  the  several  states,  ranging  from  8.5  per  cent  in  Iowa 
to  56.8  per  cent  in  Massachusetts.  It  is  relatively  low  for 
agricultural  states  and  high  where  manufacturing  takes  a 
prominent  place  among  business  undertakings.  This  leads 
naturally  to  the  conclusion,  that  the  corporation,  as  the 
chief  securities-issuing  type  of  ownership  organization,  is 
the  favorite  form  under  which  to  conduct  a  manufacturing 
or  industrial  enterprise.  The  reports  of  the  Bureau  of  the 
Census  seem  to  indicate  that  the  personal  ownership  types  of 
organization  in  manufacturing,  while  exhibiting  a  slight  in- 
crease in  actual  number  from  1904  to  1914,  nevertheless 
show  a  relative  decrease  in  comparison  with  securities- 
issuing  types.  In  the  number  of  wage  earners  employed 
and  the  value  of  their  product,  the  decline  of  the  personal 
ownership  types  is  quite  pronounced. 


Character  of  Owts^ership  Organization  of  Manufacturing 

Establishments  in  the  United  States  * 


1904 

1909 

1914 

Number  of  estab- 
lishments: 

Individual 

Corporation .  .  . 
other 

113,940 
51,097 
51,137 

Per 
cent 
52.7 
23.6 
23.7 

140,605 
69,501 

58,385 

Per 

cent 
52.7 
25.9 
21.7 

12.2 
75.6 
12.2 

142,436 
78,151 
55,204 

Per 

cent 
51.6 
28.4 
20.0 

Totals 

Number  of  wage 
earners: 

Individual 

Corporation .  .  . 
other 

216,180 

755,923 

3,862,698 

849,762 

13.8 
70.6 
15.5 

268,491 

804,883 

5,002,393 

807.770 

275,791 

777,568 

5,649,646 

679,123 

10.1 

80.3 

9.7 

Totals 

Value  of  product: 

Individual 

Corporation .  .  . 
Other         

5,468,383 

$1,702,8.30,624 

10,904,069,.307 

2,187,002,632 

11.5 
73.7 
14.8 

6,615,046 

$2,092,061, .504 
16,341,116,634 

2,288,823,732 

9.9 
79.0 
11.1 

7,036,337 

$1,925,518,298 

20,177,084,844 

2,143,831,582 

7.9 

83.2 

8  8 

Totals 

$14,793,902,563 

$20,672,051,870 

$24,246,434,724 

*  From  the  reports  of  the  Bureau  of  the  Census. 


90       SECURITIES-ISSUING    ORGANIZATIONS 

Statistics  for  more  recent  years,  indicate  that  the  issu- 
ance of  securities  for  business  purposes,  while  it  did  suffer 
severely  from  the  war,  has,  nevertheless,  kept  pace  with  pre- 
ceding years.  This  is  particularly  true  of  the  United  States, 
of  Japan,  and  of  some  of  the  South  American  countries 
which  were  not  so  seriously  affected  by  the  conflict  as  were 
the  countries  of  Europe.  But  even  in  Europe,  the  quantity 
of  securities  issued  for  business  purposes  since  the  war  is 
without  precedent.  This  unusual  rise  may  be  ascribed  in 
large  measure  to  the  decline  in  the  value  of  money  and  the 
prospect  of  large  profits  inspired  by  high  prices,  caused  by 
a  general  scarcity  of  goods.  The  issuance  of  the  so-called 
"  stock  dividends  "  to  avoid  the  technicalities  of  the  federal 
income  tax,  is  also  a  contributing  factor  in  this  country. 
The  trend  of  security  issues  put  out  in  the  United  States  by 
railroads,  industrial  and  public  service  enterprises  is  shown 
by  the  following  table. ^  The  amount  used  for  refunding  is 
not  an  addition  to  the  total  of  securities  in  the  country,  but 
represents  the  amount  of  new  securities  directly  substituted 
for  old  ones. 

5  From    data    compiled    by    Mr.  Brown  of   the  Guaranty  Trust  Co.  of 
New  York. 


THE    NATURE    OF    SECURITIES 


91 


New  Securities  Issued  in  the  United  States  for  Business 
Purposes,    1913-1920 


Railroad 

Industrial 

Public 

utility 

Corporate 
Total 

1920  (to  May  30) 

$81,875,000 
138,255,000 

$140,468,000 
279,604,000 
908,301,550 

$70,973,500 

129,217,000 

54,579,150 

$293,314,500 

Notes 

497,076,000 

Stock 

962,880,700 

Total 

1919 

Bonds 

§220,128,000 

118,330,600 
132,588,000 

$1,278,373,550 

301,475,000 

219,136,000 

1,582,575,710 

$254,769,650 

272,335,300 

252,408,500 
66,l()s,s<M) 

$1,753,172,200 
692,140,900 

Notes 

Stock 

604,132,500 

l,04s,(;s4,600 

Total 

.5250,918,600 

$2,103,186,710 

134,535,000 
246,016,000 
174,124,750 

§590,852,600 

167,995,000 

261,563,900 

22,044,750 

§2  944  95.s,000 

1918 

Bonds 

138,514,100 
71,198,500 

441,044,100 

Notes 

587,778,400 

Stock 

196,169,500 

Total 

$209,712,600 

$554,675,750 

243,325,000 
217,056,400 
312,020,080 

$451,603,650 

148,498,200 

145,645,600 

69,069,470 

$1,215,992,000 

1917 

Bonds 

Notes 

Stock 

142,500,000 

276,165,000 

22,192,400 

534,323,200 
638,867,000 
403,281,950 

Total 

1916 

.$440,857,400 
$229,000  000 

$722,401,480 

$241,000,000 
137,000,000 
573,000,000 

$363,213,270 

§383,000,000 

114,000,000 

45,000,000 

$1,576,472,150 
$853  000,000 

Notes 

126,000,00c 
16,000,000 

377,000,000 

Stock 

634,000,000 

Total 

1915 
Bonds 

.:f371,000,000 

418,500,000 

188,000,000 

16,000,000 

$951,000,000 

137,500,000 

96,000,000 

337,500,000 

§542,000,000 

149,000,000 

137,000,000 

38,000,000 

§1,864,000,000 
768,000,000 

Notes 

421,000,000 

Stock 

390,500,000 

Total 

1914 
Bonds 

$684,500,000 

303,000,000 

390,000,000 

21,500,000 

$571,000,000 

146,500,000 
58,000,000 
67,000,000 

$324,000,000 

195,000,000 

107,500,000 

43,500,000 

$1,579,500,000 
644,500,000 

Notes 

555,500,500 

Stock 

132,000,000 

Total 

1913 
Bonds 

$714,500,000 

303,500,000 
421,000,000 
234,000.000 

$271,500,000 

06,000,000 

91,000,000 

121,000,000 

$346,000,000 

280,500,000 

105,000,001 

68,000,000 

$1,332,000,000 
650,000,000 

Notes 

617,000,000 

Stock 

423,000,000 

Total 

$958,500,000 

$278,000,000  $453,500,000 

$1,690,000,000 

The  amounts  used  for  refunding    and  new  capital  for  some  of  the  years 
covered  in  the  above  table  are  as  follows: 

Neio 

ca  pital 

$1,179,472,150 

1,359,000,000 

784,500,000 

782,000,000 


Amount  used 

for  refwuiing 

1917 

$397,000,000 

1916 

325,000,000 

1915 

795,000,000 

1914 

550,000.000 

92       SECURITIES-ISSUING    ORGANIZATIONS 

The  Transferability  of  Securities.  —  The  quality  of 
free  and  unrestricted  transferability  is  one  of  the  most 
important  characteristics  peculiar  to  securities.  The 
instruments  themselves,  as  well  as  all  the  rights,  duties, 
powers  and  obligations  that  the  owner  of  them  possesses, 
may  be  freely  transferred  by  sale,  or  any  other  legitimate 
means,  from  person  to  person  in  exactly  the  same  way  as  a 
bushel  of  wheat  might  be  sold. 

This  quality  has  given  rise  to  brokers  who  specialize  in 
serving  buyers  and  sellers  of  securities  by  acting  as  agents 
for  them.  They  facilitate  transactions  in  securities  by 
finding  buyers  for  those  offered  and  by  finding  securities  for 
persons  who  wish  to  buy.  To  aid  them  in  this  work,  these 
brokers  have  established  stock  exchanges,  —  institutions 
where  brokers  and  others  may  gather  to  buy  and  sell 
securities  for  themselves  and  their  principals.  The  largest 
of  these  exchanges  are  found  in  New  York  City,  London, 
Paris  and  Berlin;  but  practically  every  country  and  many 
of  the  large  cities  of  the  world  have  their  own  smaller 
exchanges. 

The  freedom  with  which  securities  are  bought  and  sold 
on  these  exchanges  is  well  brought  out  in  the  following  sum- 
mary of  annual  sales  of  stocks  and  bonds  on  the  New 
York  Stock  Exchange  from  1912  to  1919. 


THE    NATURE    OF    SECURITIES 


93 


Securities  Sold  on  the  New  York  Stock  Exchange 

1912-1919 


Year 

Shares  of  Stock 

Bonds 

(Number  of  shares) 

(in  dollars) 

1912 

131,128,415 

$675,213,500 

1913 

83,470,693 

501,571,020 

1914  6 

47,900,568 

461,522,600 

1915^ 

173,145,203 

961,094,700 

1916 

233,311,993 

1,140,851,950 

1917 

185,628,948 

1,057,190,200 

1918 

144,118,469 

2,067,827,500 

1919 

316,787,725 

3,808,860,150 

6  The  Exchange  was  closed  for  several  weeks  in  1914 
following  the  outbreak  of  the  European  War. 

^  The  great  increase  in  the  sale  of  bonds  from  1915  on  is 
due  largely  to  government  bond  issues. 

It  should  be  borne  in  mind  that  the  New  York  Stock 
Exchange  is  only  one  —  although  by  far  the  largest  —  of 
about  a  score  of  exchanges  operating  in  this  country  alone. 
Thus,  these  figures  would  have  to  be  considerably  aug- 
mented if  they  are  to  show  the  total  dealings  in  securities  in 
the  United  States.  The  average  value  of  the  shares  of  stock 
sold  on  the  New  York  Stock  Exchange  in  1919,  at  a  con- 
servative estimate,  can  be  taken  at  about  $75.00  per  share, 
which  would  give  the  stocks  sold  on  this  exchange  during 
that  year  a  selling  value  of  $23,759,000,000,  making  a 
combined  total  for  stocks  and  bonds  of  well  over  twenty- 
five  billion  dollars. 

The  importance  that  such  statistics  have  in  relation  to 
the  subject  of  business  organization,  arises  from  the  fact 
that  they  show  clearly  the  great  liquidity  that  characterizes 
the  ownership  of  economic  capital  when  it  has  once  been 
brought  under  the  control  and  ownership  of  securities- 
issuing  organizations. 


94       SECURITIES-ISSUING    ORGANIZATIONS 

Further  evidence  of  this  liquidity  is  shown  by  the  fol- 
lowing table,  which  gives  in  parallel  columns  the  total 
outstanding  securities  listed  on  the  New  York  Stock  Ex- 
change by  several  of  the  larger  American  corporations,  the 
par  value  of  the  securities  sold  on  the  Exchange  during 
1919  and  the  per  cent  that  the  securities  sold  is  of  the  secur- 
ities listed. 

Table  Showing  Secukities  Listed  on  the  New  York  Stock 
Exchange,  the  Par  Value  of  Securities  Sold  and  the 
Per  Cent  of  Turnover  of  a  Few  Large  American  Corpo- 
rations for  the  Year  1919 


Name  of  Corporation 

Securities  listed 
on  exchange 

Par  value  of 
securities  sold 
on  exchange 

Per  cent 

of 
turnover 

American  Can  Co. 

Stock,  common 

pref'd 

$41,233,300 
41,233,300 
11,872,-500 
94,339,100 

$293,494,000 
4,134,500 

711.8 
10.3 

Bonds 

Totals 

297,628,500 

315.4 

American  Locomotive  Co. 

Stock,  common 

pref'd 

25,000,000 
25,000,000 
50,000,000 

272,994,500 

1,419,500 

274,414,000 

1092.0 
5.7 

Totals  

548.8 

American  Telephone  &  Tele- 
graph Co. 
Stock 

443,951,100 
407,434,080 
851,385,180 

70,467,000 
16,226,500 
86,693,500 

15.9 

Bonds 

4.0 

Totals 

10.2 

International  Harvester 
Company 

Stock,  common 

pref'd 

80,000,000 

60,000,000 

140,000,000 

50,800,000 

1,587,300 

52,387,300 

63.5 
2.6 

Totals      .    . 

37.4 

International  Mercantile 
Marine  Co. 
Stock,  common 

39,230,900 

48,8(')7,3()0 

39,061,000 

127,159,200 

607,560,000 

448,375,500 

16,490,000 

1,072,425,500 

1549.8 

pref'd  

917.5 

Bonds       

42.2 

Totals 

843.4 

THE    NATURE    OF    SECURITIES 


95 


Name  of  Corporation 

Securities  listed 
on  exchange 

Par  value  of 
securities  sold 
on  exchange 

Per  cent 

of 
turnover 

New  York  Central  R.  R. 
Company- 
Stock   

$247,869,100 
688,285,200 
936,154,300 

$76,024,800 
14,779,000 
90,803,800 

30.6 

Bonds      

2.2 

Totals 

9.7 

United  States  Rubber 
Company 

Stock,  common 

pref'd 

67,679,500 

62,036,400 

127,715,900 

433,855,500 

5,370,000 

439,225,500 

641.0 

8.7 

Totals 

343.9 

Cluett,  Peabody  &  Co. 

Stock  

25,000,000 

4,580,000 

18.3 

Refining  Co. 

Stock,  common 

pref'd 

60,998,000 

50,000,000 

31,881,400 

142,879,400 

202,868,000 
4,315,000 
3,169,000 

210,352,000 

332.6 

8.6 

Bonds 

Totals 

9.9 

147.2 

United  Cigar  Stores  Co. 

Stock,  common 

pref'd 

5,897,250 

4,527,000 

10,424,250 

152,349,500 

151,000 

152,500,500 

2600.0 
3.3 

Totals 

1464.0 

United  States  Steel 
Corporation 

Stock,  common 

pref'd 

508,302,500 
360,281,100 
586,786,348 

3,257,047,000 

18,309,500 

8,925,000 

640.8 
5.8 

Bonds 

1.5 

Totals 

1,455,369,948 

3,284,281,500 

225.7 

Some  of  these  corporations  exhibit  extreme  activity,  and 
others  a  high  degree  of  inactivity  in  dealings  in  their  secur- 
ities. Thus,  while  the  sales  of  the  securities  of  the  American 
Telephone  and  Telegraph  Company  average  only  10.2  per 
cent  of  those  listed,  the  sales  of  the  United  Cigar  Stores 
Company  average  1464  per  cent. 


96       SECURITIES-ISSUING    ORGANIZATIONS 

It  should  also  be  noted,  that  the  percentage  of  sales  is 
lowest  in  the  case  of  bonds  and  highest  in  common  stock. 
This  is  no  more  than  natural;  the  bonds  are  ordinarily 
safe  and  conservative  investments  whose  price  fluctuates 
little  day  by  day,  while  the  common  stock  frequently  is 
highly  speculative,  with  wide  daily  price  fluctuations 
influenced  in  part,  at  least,  by  anticipated  profits.  This, 
however,  is  not  the  only  reason  for  the  enormous  sale  of 
stocks.  An  interesting  insight  into  a  contributing  cause,  is 
given  by  a  report  issued  by  the  directors  of  the  United 
States  Steel  Corporation  on  June  30,  1920.  This  report 
gives  the  approximate  number  of  shares  of  the  corpora- 
tion's common  stock  held  by  investors  and  by  speculators 
on  certain  dates  as  follows: 

June  30,  1920  Per  Cent         December  31,  1916       Per  Cent 

Brokers    1,631.406  32.09  2.950,436  58.04 

Investors    3,451,619  67.91  2,132,589  41.95 

Total  issue    ...     5,083,025  5,083,025 

The  stock  held  by  the  brokers  is  chiefly  for  the  purposes 
of  speculation,  and  not  primarily  for  the  return  in  divi- 
dends, which  is  the  cliief  aim  of  the  investor.  Brokers' 
stocks  are  dealt  in  on  the  Stock  Exchange  like  wheat  or 
cotton  on  the  Produce  Exchange,  —  as  though  they  were 
simply  commodities  whose  price  is  determined  by  the  general 
variation  in  intensity  of  demand  and  supply.  It  frequently 
happens  that  the  stock  of  a  corporation  has  practically  no 
prospect  of  receiving  a  dividend,  and  yet  has  a  speculative 
value  that  causes  it  to  sell  at  $10  to  $20  per  share.  Such 
was  the  case,  for  example,  with  common  stock  of  the  old 
United  States  Leather  Company,  which  sold  at  about  $10 
a  share  in  the  face  of  unpaid  dividends  aggregating  41% 
due  the  preferred  stock,  and  payable  before  the  common 
stockholder  could  hope  to  receive  an  income  from  his  se- 
curities. The  same  condition  has,  from  time  to  time,  been 
very  marked  among  stocks  of  defunct  corporations.    It  is 


THE    NATURE    OF    SECURITIES  97 

because  of  their  controlling  power  that  they  seldom  lose 
their  value  completely  so  long  as  an  attempt  is  made  to 
continue  the  business. 

The  Principle  of  "Securitization"  of  Ownership. — 
Enough  has  been  said  of  the  nature,  extent  and  effect  of  se- 
curities to  show  the  importance  of  the  role  that  they  play 
in  modern  business  organization.  It  is,  indeed,  very  doubt- 
ful whether  the  great  establishments  found  today  in  the 
fields  of  industry,  commerce,  transportation,  finance,  min- 
ing, etc.,  could  operate  at  all  under  a  system  of  private 
ownership  of  capital,  but  for  the  existence  and  general  use 
of  securities.  Thus  far,  however,  only  the  nature  of  securi- 
ties themselves  has  been  discussed,  and  nothing  has  been 
said  about  the  principles  that  underlie  securitization  of 
business  capital;  that  is  to  say,  the  use  of  securities  as  in- 
struments of  organization  to  give  the  holder  thereof  a  claim 
to  the  designated  business  capital  and  to  the  income  ac- 
cruing to  it. 

Elimination  of  Personal  Control,  the  Keystone. — 
Under  the  forms  of  organization  that  have  thus  far  been 
described,  the  ownership,  management  and  direction  of  the 
plant  and  equipment  of  the  business  remains  in  the  hands 
of  the  natural  entrepreneur,  regardless  of  whether  he  is  an 
individual  proprietor  or  a  partner.  The  power  to  withdraw 
is  his,  but  when  he  exercises  it  he  breaks  up  the  organi- 
zation. Such  types  of  organization  do  not  assure  to  the 
business  a  continuity  of  existence  for  a  definite  period  of 
time,  because  they  do  not  entertain  the  concept  of  the  ex- 
istence of  the  business  separate  and  apart  from  the 
lives  of  the  owners.  Here,  then,  we  find  the  first  and 
most  important  point  of  departure  from  the  principles 
underlying  the  personal  ownership  organizations.  Through 
the  use  of  securities  the  existence  of  the  business 
becomes  divorced  from  the  life  and  being  of  the 
natural   entrepreneur.     It   endures    for   a   definite   period 


98       SECURITIES-ISSUING    ORGANIZATIONS 

of  time,  or  in  perpetuity,  unless  voluntarily  and 
lawfully  abandoned  by  the  operating  and  owning  body. 
This  body  is  interposed  between  tlie  entrepreneur  and  the 
business  in  which  he  is  interested.  It  is  not  a  conscious, 
tangible  being,  but  merely  a  hypothetical  one;  and  thus,  it 
is  incapable  of  conscious  action,  except  through  the  agency 
of  natural  persons.  This  delegation  of  authority  is  pro- 
vided for,  and  the  responsibility  therefor  allocated,  through 
the  medium  of  stock  certificates.  These,  as  already  stated, 
incorporate  in  themselves  a  claim  on  income  and  assets 
and  a  right  to  participate  in  the  management,  etc.,  of  the 
enterprise.  It  is  the  person  of  the  holder  of  this  stock, 
who  exercises  the  rights  that  belong  to  it.  The  securi- 
tization of  business,  thus,  results  in  the  introduction  of  a 
new  principle  of  entrepreneurial  organization  —  the  inter- 
position of  a  securities-issuing  body  between  the  entrepre- 
neur and  his  business  capital.  Technically  speaking,  the 
securities-issuing  body  itself  is  the  entrepreneur  of  the  busi- 
ness that  it  owns  and  operates.  But,  since  it  can  function 
only  through  natural  persons  to  whom  also  part  of  the 
liability  may  carry  over,  this  technicality  may  be  dis- 
regarded. 

Types  of  Securities-Issuing  Organizations.  —  Up  to  the 
present  time  three  important  types  of  securities-issuing 
organizations  have  been  evolved.  For  all  of  them,  the 
underlying  principle,  as  explained  above,  is  the  same.  The 
characteristics  and  qualities  that  distinguish  one  from  the 
other  are  of  a  legal  nature  and  of  such  importance  to  a 
thorough  understanding  of  each  of  the  types  that  they  are 
reserved  for  fuller  consideration  and  explanation  in  suc- 
ceeding chapters. 

The  first  of  these  types  is  a  development  of  the  partner- 
ship. A  voluntary  association,  or  company,  is  formed  in 
whose  managing  board  is  vested  the  control  of  the  business, 
while  the  ownership  for  all  practical  purposes  is  in  the  asso- 


THE    NATURE    OF    SECURITIES  99 

elation  itself.  Membership  in  this  association  constitutes 
entrepreneurial  participation  in  the  business.  This  is  obtain- 
able through  the  acquisition  of  the  shares  of  stock  that  are 
issued  by  the  association,  and  that  have  all  of  the  earmarks 
of  securities.  Creditor's  interest  is  represented  by  bonds  or 
notes.  Such  associations  are  known  as  joint  stock  com- 
panies or  joint  stock  associations. 

The  second  type  is  formed  by  interposing  between  the 
entrepreneur  and  his  capital  an  artificial  person,  created  by 
the  state  and  existing  only  in  contemplation  of  law.  The 
right  of  ownership,  and  the  power  of  operation  of  the  busi- 
ness, is  vested  in  this  person  who  depends  for  conscious 
action  upon  policies  dictated  by  the  stockholders  and 
carried  out  by  directors  and  agents.  This  form  is  the 
corporation. 

The  third  type  rests  upon  the  transfer  of  title  to  the 
property,  together  with  power  of  management  or  direction, 
in  trust  to  a  person  or  body  of  persons.  The  entrepre- 
neurs thus  become  the  beneficiaries  of  the  trust  and  share  in 
the  profits  according  to  the  number  of  units  of  trust  certifi- 
cates (securities)  that  they  own.  This  form  is  called  the 
secwrities-issuing  trust  or  tritst  on  shares. 

It  is  under  these  three  types  of  entrepreneurial  organi- 
zation, that  the  great  business  undertakings  of  today  are 
conducted.  Of  the  three,  the  corporation  offers  the  great- 
est inducements  to  the  undertaker  of  a  business.  The  joint 
stock  company  has  seen  its  best  days,  and  the  use  of  the  se- 
curities-issuing trust  has  as  yet  not  come  into  general  favor. 
Thus,  the  corporation  is,  today,  the  ownership  foundation 
upon  which  have  been  erected  the  world's  big  business 
establishments  conducted  as  private  enterprises. 


CHAPTER    VI 

THE    JOINT    STOCK    COMPANY 

The  principle  underlying  all  securities-issuing  organi- 
zations is  the  creation  of  a  business  organization  that  shall 
enjoy  an  existence  separate  and  apart  from  the  members 
that  compose  it.  To  accomplish  this  there  must  be 
formed  an  organization  that  has  more  or  less  permanent 
control  over  a  definite  amount  of  business  capital  con- 
tributed to  it  by  its  members,  and  that  will  at  the  same 
time  permit  a  member  freely  to  withdraw  without  dis- 
rupting its  unity.  The  earliest  approach  to  the  realization 
of  this  idea  was  the  joint  stock  company.^ 

Definition.  —  From  the  legal  standpoint,  the  joint  stock 
company  is  a  partnership,  created  by  a  contract  in  the  form 
of  written  articles  of  association  that  set  forth  clearly  the 
conditions  under  which  the  company  is  to  be  formed  and 
operated.  It  may  be  defined  as  a  voluntary  association 
of  individuals  for  profit,  having  a  capital  divided  into 
transferable  shares,  the  ownership  of  which  is  a  condition 
of  membership,  directed  by  a  board  selected  by  the  mem- 
bers and  operated  by  its  agents.  In  other  words  it  is  a 
securities-issuing  partnership  that,  in  a  limited  respect, 
has  an  existence  apart  from  the  lives  of  its  members.  Thus, 
it  is  essentially  a  common  law  organization. 

Formation.  —  In  the  United  States  a  joint  stock  com- 
pany may  generally  be  formed  under  common  law  rules  by 

1  In  France  the  nearest  approach  to  otir  joint  stock  company  is  the 
societe  anonyme  par  actions,  in  Germany  the  Aktiengesellschaft 
and  in  Italy  the  societa  per  azioni. 

100 


THE    JOINT    STOCK    COMPANY  101 

drawing  up  articles  of  association  which  are  subscribed  to 
by  the  organizers.  However,  in  most  of  the  states  these 
laws  have  been  reduced  to  statutes.  In  a  few,  special  re- 
quirements regulating  capitalization,  securities,  registration, 
method  of  bringing  suit,  etc.,  exist.  In  New  York,  for  ex- 
ample, these  companies  must  be  formed  under  the  same 
general  laws  that  govern  the  formation  of  a  corporation. 
That  is  to  say,  the  organizers  must  frame  their  articles  of 
association,  submit  them  to  the  secretary  of  state,  pay  a 
franchise  tax  and  have  the  company  properly  registered 
with  a  designated  official  in  the  county  and  the  state.  In  ad- 
dition to  this,  every  stock  company  formed  under  the  laws 
of  this  state  must,  within  sixty  days  after  its  formation, 
and  thereafter  in  each  January,  file  with  the  secretary  of 
state  and  with  the  county  recorder  a  written  certificate 
giving  its  name,  date  of  organization,  number  of  stock- 
holders, names  and  residences  of  its  officers,  and  its  place 
of  business.  In  England  and  the  countries  of  Continental 
Europe  the  formation  of  these  companies  has  been  regu- 
lated more  or  less  strictly  ever  since  the  great  stock 
swindles  of  the  early  eighteenth  century  which  were  brought 
to  a  climax  by  the  company  formed  by  John  Law  to  finance 
France.  Thus,  the  common  law  rules  for  the  formation 
of  joint  stock  companies  have  been  almost  universally 
superseded  by  statutory  regulations.  In  some  countries, 
as  in  Germany  and  Belgium,  these  are  very  strict  and  exact- 
ing, while  in  England  and  the  United  States  the  tendency 
is  to  adhere  more  closely  to  the  common  law  practice. 

The  Articles  of  Association  —  the  name  applied  to  the 
written  contract  by  virtue  of  which  the  company  is  created 
—  usually  contain  statements  setting  forth  (1)  the  name 
under  which  the  company  is  to  do  business,  (2)  its  place 
of  business  or  main  office,  (3)  the  objects  for  which  it  is 
organized,  (4)  its  capital,  number  of  shares  and  their  man- 
ner of  assignment  or  transfer,  (5)  the  number,  manner  of 


102     SECURITIES-ISSUING    ORGANIZATIONS 

selection  and  duties  of  the  officers,  directors  and  trustees, 

(6)  the  duties,  rights,  obligations,  etc.,  of  the  members, 

(7)  procedure  for  amending  or  altering  the  articles  of  asso- 
ciation, (8)  the  term  of  life  and  the  manner  in  which 
voluntary  dissolution  may  be  effected.^  Where  the  common 
law  rules  of  formation  generally  prevail,  the  organizers  en- 
joy considerable  latitude  in  framing  the  articles  and  may 
provide  any  number  and  variety  of  special  features. 

Capitalization  and  Stock.  —  The  capital  of  the  joint 
stock  company  is  customarily  stated  as  a  definite  sum  of 
money,  which  has  been  or  is  to  be  contributed  by  the 
organizers  and  others,  who  receive  shares  of  stock  to  repre- 
sent their  contributions.  But  there  are  exceptions  to  this 
general  rule.  In  organizing  joint  stock  companies  to 
operate  the  beet  sugar  enterprises  of  Germany  the  farmers 
were  frequently  given  shares  of  stock  in  return  for  which 
they  signed  contracts  obliging  themselves  to  furnish  the 
company  annually  a  stipulated  quantity  of  beets  with  a 
stated  sugar  content.  If  they  failed  to  keep  their  contract 
the  shares  would  revert  to  the  company.  The  capital,  or 
joint  stock  as  it  was  formerly  called,  remains  as  the  in- 
divisible property  of  the  company,  so  that  a  shareholder 
may  not  withdraw  from  the  company  that  part  to  which 
he  is  entitled  except  in  case  of  dissolution.  If  he  desires 
to  withdraw  from  the  enterprise  or  to  liquidate  his  interest 
in  it  he  merely  assigns  or  sells  his  shares  to  some  other 
person,  without  ordinarily  affecting  the  capital  over  which 
the  company  has  control. 

Ownership  is  represented  by  shares  of  stock  which  have 
all  the  earmarks  of  securities.  Each  share  is  usually  a  like 
fractional  part  of  the  capital.  Thus,  in  the  articles  re- 
ferred to  in  the  preceding  note  it  is  provided  that  the  capi- 
tal of  $3,000,000  is  divided  into  30,000  shares  of  $100  each 

~  See  the  copy  of  the  Articles  of  Association  of  the  Pierce- 
Fordyce  Oil  Association  —  Part  VI,  Form  4. 


THE    JOINT    STOCK    COMPANY  103 

all  of  which  has  been  paid  in  by  the  subscribers.  In  both 
England  and  America  it  is  not  necessary  that  the  company 
shall  have  received  the  full  amount  of  the  stated  value  of 
each  share  in  payment  thereof,  but  in  Germany  and  Bel- 
gium the  statutes  prescribe  that  no  stock  may  be  issued  by 
the  company  for  cash,  property  or  services  of  less  value 
than  the  par  of  the  stock.  Certificates  representing  single 
shares  or  multiples  thereof,  are  given  the  shareholders  as 
evidences  of  ownership.  Each  certificate  states  that 
the  holder,  who  is  usually  named,  is  the  owner  of 
the  stated  number  of  shares  of  the  capital  stock  of 
the  company,  sets  forth  the  more  important  limitations 
on  the  rights  and  privileges  of  the  holder,  the  pro- 
cedure to  be  followed  in  case  of  transfer  or  assignment 
and  bears  the  signatures  of  the  president  and  secretary  of 
the  company.  The  transfer  is  effected  when  the  holder  of 
the  certificate  signs  it  over  to  another  person  who  has  the 
transfer  recorded  on  the  books  of  the  company. 

Ordinarily,  each  shareholder  has  a  claim  on  the  unen- 
cumbered assets  and  earnings  of  the  company  equal  to 
the  same  percentage  that  his  shares  bear  to  the  total  num- 
ber of  shares  that  are  outstanding,  and  also  one  vote  for 
each  share  that  he  owns.  However,  several  classes  of 
shares  may  be  provided  for,  so  that  the  holders  of  one 
class  may  be  given  preference  over  the  holders  of  other 
classes  in  respect  to  one  or  more  of  the  above  points. 

Other  securities  such  as  bonds  and  notes  may  also  be 
issued  as  part  of  the  series  of  securities.  But,  in  practice, 
securities  of  this  type  seem  to  have  found  little  favor, 
probably  because  they  impose  a  relatively  heavy  risk  upon 
the  shareholders  who,  in  most  cases,  assume  partnership 
liability. 

Internal  Organization.  —  The  elements  of  internal  or- 
ganization of  the  joint  stock  company  are  (1)  the  body  of 
shareholders,  (2)  the  board  of  governors  or  directors,   (3) 


104     SECURITIES-ISSUING    ORGANIZATIONS 

the  trustees  and  (4)  the  officers  and  agents.    It  is  through 
these  that  the  company  becomes  an  active  business  unit. 

(1)  The  body  of  shareholders  is  a  functioning  element  of 
the  organization  only  when  it  has  been  properly  called  to- 
gether at  an  annual  or  special  meeting  in  accordance  with 
the  provisions  of  the  articles  of  association  or  the  statutes. 
At  the  regular  or  annual  meetings,  the  shareholders  vote 
to  elect  persons  to  serve  as  directors  for  the  ensuing  year, 
and  to  pass  upon  any  and  all  matters  that  the  board 
may  see  fit  to  place  before  them.  The  body  of  shareholders 
also  has  power  to  amend  and  alter  the  articles  of  associa- 
tion, to  dissolve  the  company  or  abandon  the  enterprise. 
This  body,  thus,  constitutes  the  basic  or  fundamental  ele- 
ment in  the  administrative  organization.  Generally  it  is 
too  large  and  unwieldy  to  participate  in  any  direct  ad- 
ministrative work,  and  for  this  reason  it  is  usually  stipu- 
lated in  the  articles  that  the  active  control  of  the  business 
shall  be  vested  in  the  board  of  directors  or  governors. 
The  individual  shareholder  himself  has  absolutely  no 
power  to  bind  the  company  in  any  business  or  other  trans- 
action. Here,  then,  is  one  important  point  of  difference 
distinguishing  the  joint  stock  company  from  the 
partnership. 

(2)  The  board  of  directors,  governors  or  managers  is 
usually  authorized  to  exercise  "  full  power  and  authority 
in  the  conduct  of  the  business,"  to  call  meetings  of  the 
board  and  of  the  body  of  shareholders,  to  appoint  trustees 
and  officers  and  to  declare  dividends.^  Such  boards  are 
nearly  always  elected  by  the  holders  of  the  stock  certifi- 
cates. Ownership  of  at  least  one  share  of  stock  is  ordi- 
narily prescribed  as  a  qualification  for  membership  on  the 
board:  and  the  term  of  office  is  one  year. 

3  The  commercial  code  of  Germany  provides  that  dividends  shall 
be  declared  by  the  body  of  stockholders  properly  assembled  in  a 
meeting  called  for  that  purpose. 


THE    JOINT    STOCK    COMPANY  105 

(3)  Three  or  more  trustees  to  be  appointed  by  the  board 
of  directors  are  provided  for  in  the  articles,  "  in  whose  name 
all  investments  and  title  to  all  property  are  to  be  made  and 
held  under  a  declaration  of  trust  for  and  on  behalf  of  the 
association."  The  trustees  are  necessary  if  the  company  is 
to  hold  any  real  estate,  since  under  the  common  law  real 
property  can  be  held  only  in  the  name  of  a  person.  In  some 
European  countries  trustees  are  dispensed  with  by  statutory 
provisions  empowering  the  company  to  hold  such  property 
in  its  own  name. 

(4)  The  officers  are  usually  a  president,  a  vice-president, 
a  secretary  and  a  treasurer.  These  are  appointed  by  the 
board  of  directors,  which  may  also  delegate  to  them  such 
of  its  powers  and  duties  as  may  be  consistent  with  the 
articles  of  association.  In  addition  to  this,  the  articles 
specifically  assign  to  each  of  the  officers  such  duties  as  it 
is  customary  for  them  to  perform. 

External  Relations  —  The  joint  stock  company  is  not 
a  legal  entity.  In  this  respect  it  is  like  the  partnership, 
for  it  cannot  sue  or  be  sued,  in  its  own  name.  If  a  legal 
action  is  to  be  brought  by  or  against  the  company,  it  must 
be  by  or  against  one  or  more  of  the  members,  severally  and 
jointly.  Some  of  the  states  have  modified  this  rule  some- 
what by  statute.  In  New  York,  for  example,  suit  must 
first  be  brought  against  the  president  or  treasurer,  and  if 
no  satisfaction  is  secured  in  case  of  a  judgment  against 
them,  the  complainant  may  proceed  to  sue  under  the  com- 
mon law  rule.  However,  modifications  such  as  the  above 
have  no  power  or  effect  in  states  other  than  the  one  in 
which  they  have  been  made.  Thus,  in  a  case  decided  in 
1871  it  was  held  that  a  citizen  of  Massachusetts  might 
sue  a  member  of  a  New  York  joint  stock  company  to  re- 
cover a  claim  against  the  company  without  first  bringing 
his  action  against  the  president  or  the  treasurer.* 

4  Taft  V.  Ward,  106  Mass.  518. 


106     SECURITIES-ISSUING    ORGANIZATIONS 

Furthermore,  the  members  are  individually  liable  for 
the  entire  debts  of  the  company,  just  as  in  the  partnership. 
However,  in  practice,  limited  liability  may  be  secured  by 
providing  in  any  and  all  contracts  made  by  or  in  behalf  of 
the  company,  that  it  is  specifically  understood,  as  a  part  of 
such  contract,  that  the  company's  property  solely  is  bound. 
But  such  a  provision  must  be  made  part  of  the  terms  of 
the  contract  to  be  binding. 

Permanence  and  Stability.  —  In  the  matter  of  dissolu- 
tion the  par'^nership  principle  is  not  followed.  Although  at 
law,  the  articles  of  association  when  acted  upon  do  not  set 
up  a  legal  entity,  they,  nevertheless,  do  establish  a  busi- 
ness entity,  or  unit,  which  the  law  recognizes  as  somewhat 
distinct  from  the  persons  of  the  several  members.  Conse- 
quently any  member  may  freely  w^ithdraw,  may  become  a 
bankrupt  or  may  be  taken  by  death  without  affecting  the 
continuity  of  the  organization.  The  company  may  be 
created  in  perpetuity  or  for  a  definite  number  of  years. 
In  the  latter  case,  its  period  of  life  may  be  extended  by 
renewal  of  the  agreement.  The  difficulty  of  liquidating  the 
assets  and  distributing  the  receipts  among  the  several  share- 
holders, is  of  itself  a  powerful  influence  working  toward 
the  renewal  of  the  agreement. 

With  the  exception  of  forced  dissolution  arising  out  of 
a  condition  of  insolvency,  or  a  decree  of  the  courts  requir- 
ing the  discontinuance  of  the  business  because  of  gross  and 
continual  violation  of  the  law,  all  other  causes  of  disso- 
lution may  be  considered  to  be  voluntary.  The  joint  stock 
company  is,  therefore,  one  of  the  most  stable  and  at  the 
same  time  one  of  the  most  flexible  types  of  ownership 
organization  in  use  today.  This  characteristic  has  been 
chiefly  responsible  for  the  remarkably  long  life  enjoyed 
by  some  of  these  companies.  The  British  East  India 
Company,  for  example,  was  formed  about  1600  and  con- 
tinued its  operation  until  the  middle  of  the  nineteenth  cen- 


THE    JOINT    STOCK    COMPANY  107 

tury.  In  this  country  the  Adams  Express  Company  and 
others  began  business  as  joint  stock  companies  a  few  years 
prior  to  1860  and,  in  1919,  were  still  operating  under  this 
form  of  organization. 

Value  and  Use  of  the  Joint  Stock  Company.  —  The 
heyday  of  the  joint  stock  company  was  the  great  period 
of  colonial  expansion  beginning  during  the  latter  part  of 
the  sixteenth  century  and  closing  with  the  end  of  the  eight- 
eenth century.  We  are  told  that  the  great  trading  com- 
panies of  that  period  were  nearly  all  organized  as  joint 
stock  companies  through  grant  of  a  charter  by  the  crown 
giving  them  trading  monopolies  in  certain  sections  of  the 
world.  It  was  not  until  after  the  industrial  revolution  and 
the  growth  of  large  scale  industrial  enterprises,  that  they 
were  organized  for  industrial,  as  distinct  from  commercial, 
purposes.  They  exist  to-day  in  large  numbers  in  England 
and  the  countries  of  continental  Europe,  but  are  extremely 
rare  in  the  United  States.  One  reason  for  this  is  that  in 
this  country,  corporations  could  be  easily  and  inexpensively 
formed  and  were  given  limited  liability  as  early  as  1819, 
while  in  England  the  cost  of  incorporation  was  heavy  and 
limited  liability  was  not  generally  given  to  corporations 
until  1862;  and  a  similar  condition  prevailed  on  the  conti- 
nent. Even  to-day  in  many  countries  of  Europe  it  still 
is  more  difficult  and  costly  to  form  a  corporation  than  a 
joint  stock  company;  but  even  so,  the  former  is  gradually 
displacing  the  latter.  Thus,  according  to  the  German  Offi- 
cial Commercial  Register,  we  find  that  there  were,  in  use 
in  1909,  16,508  corporations  as  against  5,222  joint  stock 
companies. 

On  the  whole,  it  may  be  said  that  although  the  joint 
stock  company  has  quite  generally  given  way  to  the  corpo- 
ration as  the  favorite  type  of  securities-issuing  organiza- 
tion, it  nevertheless  still  has  marked  advantages  over  the 
partnership.     If  properly  organized  the  danger  from  part- 


108     SECURITIES-ISSUING    ORGANIZATIONS 

nership  liability  is  too  remote  to  act  as  a  serious  drawback; 
and  the  freely  transferable  interest  represented  by  shares 
of  stock  as  well  as  the  stability  of  the  organization  are 
advantages  that  cannot  be  overlooked.  It  can  be  success- 
fully used  where  the  persons  originally  interested  in  the 
project  subscribe  to  all  of  the  stock  and  hold  it  until  the 
business  is  on  a  sound,  paying  basis.  However,  the  un- 
limited liability  accepted  by  the  shareholder  has  worked  as 
a  deterrent,  preventing  the  company  from  finding  a  ready 
market  for  its  securities,  particularly  if  the  business  is  only 
in  the  course  of  establishment,  and  has  not  yet  been  fully 
built  up  and  put  into  operation.  Another  disadvantage 
applicable  to  companies  of  this  type  organized  in  the 
United  States,  is  the  fact  that  any  special  statutory  privi- 
leges granted  them  in  any  given  state  have  no  force  or 
effect  in  other  states.  These  disadvantages  —  moderate 
though  they  are  —  leave  little  doubt  concerning  the  ulti- 
mate fate  of  the  joint  stock  company.  It  has  already  been 
put  in  a  position  of  minor  importance  and  the  probability 
is  strong  that  it  will  continue  to  lose  favor,  and,  in  time, 
will  practically  be  driven  out  of  use  by  the  corporation. 


CHAPTER   VII 

THE    CORPORATION  — ITS    NATURE    AND    ESSENTIAL 
CHARACTERISTICS 

The  corporation  is  the  second,  and  by  far  the  most 
important  one  of  the  securities-issuing,  entrepreneurial  or- 
ganizations that  are  before  us  for  consideration.  Because 
of  its  great  importance  in  modern  business,  it  will  be 
necessary  to  devote  several  chapters  of  this  text  to  an  ex- 
planation of  its  intricate  features  and  characteristics.  It 
is  perhaps  better  to  outline  its  broad,  general  features  first, 
and  then  to  take  up  in  greater  detail  its  mechanism  and 
methods  of  operation. 

The  corporation  did  not  spring  spontaneously  into  gen- 
eral use  as  a  form  of  entrepreneurial  organization.  Only 
through  the  slow  process  of  a  change  in  social  custom  did 
it  win  for  itself  the  place  that  it  now  holds  in  the  busi- 
ness world.  As  a  legal  institution  it  was  known  to  the 
Romans,  who,  however,  made  little  use  of  it  for  business 
purposes.  During  the  middle  ages,  in  England  as  well  as 
on  the  European  continent,  it  came  into  general  use  as 
a  political  institution.  The  boroughs  and  towns  of  that 
period  were  granted  corporate  charters  by  the  crown  or 
suzerain  lord  and  were  operated  as  municipal  corporations. 
Its  use  in  business  developed  gradually,  beginning  about 
the  sixteenth  century.  By  the  close  of  the  eighteenth  cen- 
tury it  had  fairly  well  established  itself  in  that  field  as  a 
common  law  institution.  But  even  at  that  time  it  enjoyed 
a  bad  repute,  as  is  evidenced  by  the  fact  that  some  of  the 
early  books  on  political  economy  condemn  it  in  no  uncer- 

109 


110     SECURITIES-ISSUING    ORGANIZATIONS 

tain  language.^  Even  as  late  as  1840,  the  governor  of  the 
State  of  Massachusetts  in  a  message  to  the  legislature  re- 
quested the  passage  of  stringent  laws  against  the  use  of 
corporations,  because  they  were  so  generally  organized  for 
fraudulent  purposes.  To-day,  however,  it  stands  unchal- 
lenged as  the  leading  form  of  entrepreneurial  organization 
in  the  business  world. 

Definition.  —  Blackstone,  in  his  Commentaries  on  Eng- 
lish Law,  published  in  1765,  defines  the  corporation  in 
the  following  words:  "  A  corporation  is  an  artificial  person 
created  for  preserving  in  perpetual  succession  certain  rights, 
which  being  conferred  on  natural  persons  only,  would  fail 
in  the  process  of  time."  Another  definition,  —  and  one  that 
has  become  the  most  famous  in  the  annals  of  American 
jurisprudence,  —  is  tliat  given  by  Chief  Justice  John 
Marshall  of  the  United  States  Supreme  Court  in  his  de- 
cision in  the  Dartmouth  College  case  in  1819.  There  he 
defines  the  corporation  as  "  an  artificial  being,  invisible, 
intangible,  and  existing  only  in  contemplation  of  law." 
The  first  of  these  definitions  lays  emphasis  upon  the  con- 
tinuous life  of  the  corporation,  which  endures  under  com- 
mon-law rules  in  perpetuity,  and  therein  differs  materially 
from  natural  persons  whose  rights  expire  with  them  on 
death.  The  second  definition  describes,  in  admirable  terms, 
this  artificial  person  that  has  a  legal  being  and  legal  rights, 
powers  and  privileges  of  its  own,  apart  and  distinct  from 
those  of  the  natural  persons,  who,  as  entrepreneurs,  avail 
themselves  of  it  for  the  purpose  of  owning  and  conducting 
a  business  enterprise.  It  is  invisible  and  cannot  be  seen. 
It  is  intangible  and  cannot  be  touched.  And  yet  it  is  a 
real  legal  person  that  can  in  its  own  right  own  and  operate 
a  business  whose  capital  may  consist  of  real  economic 
goods,  as  plant  and  equipment,  of  money  capital  or  of 

1  See  Harvard  Studies,  History  of  English  Monopolies,  Seven- 
teenth Century. 


THE    CORPORATION  —  CHARACTERISTICS   111 

securities.  But  even  in  view  of  all  this,  it  is,  neverthe- 
less, an  impersonal  type  of  organization;  for  it  cannot 
function,  but  through  the  agency  of  natural  persons. 

Legal  Entity.  —  The  fact  that  the  corporation  is  an 
artificial  person,  fixes  its  status  as  a  legal  entity,  a  being 
with  all  of  the  rights,  privileges  and  obligations  of  a  per- 
son before  the  law.  Herein,  it  differs  fundamentally  from 
the  partnership  and  joint  stock  company.  The  latter  can 
sue  and  be  sued  only  in  the  names  of  their  several  mem- 
bers, but  the  corporation  may  sue  and  be  sued  through  its 
officers  or  agents,  in  the  same  way  as  any  natural  person. 
It  may  own  real  estate  and  any  other  property  in  its  own 
name.  In  fact,  it  may  be  granted  the  right  to  enjoy  and  to 
exercise,  within  reasonable  limits,  all  rights  and  powers  and 
privileges  that  a  natural  person  might  avail  himself  of 
when  engaged  in  a  similar  business  undertaking. 

Creation.  —  As  an  artificial  person,  the  corporation  is 
a  creature  of  the  state.  It  is  created  through  the  exercise 
of  sovereign  power  by  the  state,  within  lawful  constitu- 
tional limitations.  Certain  natural  persons,  desiring  to 
form  a  corporation,  petition  the  sovereign  state,  through  the 
state's  secretary,  or  some  other  designated  official,  for  a 
charter  —  a  document  that  is  evidence  of  the  creation  and 
existence  of  the  corporation,  and,  at  the  same  time,  circum- 
scribes and  defines  its  powers,  rights  and  privileges.  The 
grant  of  such  a  charter  to  the  petitioners,  who  are  called  in- 
corporators, constitutes  —  when  acted  upon  by  them  —  a 
legal  contract  between  the  state  on  the  one  hand,  and  the 
incorporators  as  agents  of  the  corporation  on  the  other. 
Once  having  granted  such  a  charter  the  state,  in  this  coun- 
try, is  estopped  by  a  provision  in  the  Federal  Constitution 
from  revoking  or  in  any  way  impairing  the  obligation  of 
such  a  contract.  Thus,  it  cannot  subsequently  alter  the 
provisions  of  the  charter,  unless  by  specific  reservation  or 
general  statute  it  reserves  that  right  as  a  condition  of  the 


112     SECURITIES-ISSUING    ORGANIZATIONS 

grant.  As  a  case  in  point,  we  need  but  to  refer  to  the  Dart- 
mouth College  case  mentioned  above.  This  institution  was 
granted  a  charter  in  perpetuity  by  the  British  King  while 
New  Hampshire  was  still  a  British  colony.  The  war  of 
independence  intervened  between  the  time  of  that  grant 
and  the  attempt  by  the  State  of  New  Hampshire  to  revoke 
the  charter  and  to  reorganize  the  college  to  suit  itself.  The 
United  States  Supreme  Court  held  that  the  charter  consti- 
tuted a  contract  between  the  College  and  the  sovereign 
power  of  the  crown,  and  that  the  state  of  New  Hampshire 
simply  stepped  into  the  crown's  place  and  was  bound  under 
the  Constitution  of  the  United  States,  to  respect  the  con- 
tract; and  that  consequently,  it  might  in  no  way  alter 
the  provisions  of  that  contract  without  the  consent  of  the 
other  party.  This  applies  with  equal  force  to  business 
corporations.  There  is  now  no  state  in  the  Union  which 
will  grant  a  corporation  charter  without  some  form  of  reser- 
vation. The  same  principle  is  quite  generally  follow^  i  by 
all  political  jurisdictions  empowered  to  grant  charters,  es- 
pecially for  business  purposes,  whether  they  be  independent 
nations  or  not. 

In  the  early  history  of  corporations,  the  charters  were 
granted  by  special  act  of  the  creating  power.  In  this  coun- 
try, a  special  act  of  the  legislature  of  a  state  was  necessary 
to  create  a  corporation ;  while  in  England  and  the  European 
countries  this  power  was  vested  in  the  crown  or  head  of  the 
government.  This  procedure  gave  rise  to  charter  buying, 
bribery,  favoritism  and  many  other  objectionable  practices. 
It  also  resulted  in  a  complete  lack  of  uniformity,  not  only 
as  to  the  powers  granted,  but  also  in  the  matter  of  control, 
restrictions  and  obligations.  The  effect  of  these  conditions 
was  to  retard  the  general  use  of  this  very  serviceable  type 
of  entrepreneurial  organization,  rather  than  to  stimulate 
it,  and  to  give  rise  to  a  strong  and  insistent  demand  for 
greater  equality  of  opportunity  and  reform  in  procedure. 


THE    CORPORATION  —  CHARACTERISTICS     113 

By  the  middle  of  the  last  century,  however,  most  of  the 
creating  jurisdictions  had  adopted  general  statutes  laying 
down  uniform  rules  in  the  form  of  general  incorporation 
laws  for  the  formation  and  control  of  corporations.  The 
fundamental  principles  underlying  these  laws  were  con- 
sidered to  be  of  sufficient  importance  to  be  incorporated 
into  the  constitutions  of  many  of  the  states  of  our  Union. 
Nevertheless,  as  between  states,  there  is,  even  today,  an 
astounding  lack  of  uniformity  in  the  laws  governing  the 
formation,  operation  and  control  of  the  corporate  form  of 
organization.  In  this  particular,  the  United  States  is  still 
far  behind  most  foreign  countries,  which  have  laws  that 
apply  uniformly  throughout  their  territory.  The  desira- 
bility of  a  uniform  federal  corporation  law  for  this  coun- 
try has,  by  no  means,  gone  unrecognized;  but  such  bills, 
as  have  sought  to  provide  for  this,  have  quite  generally 
failed  of  passage  in  Congress  because  of  doubtful  consti- 
tutionality. 

Sphere  of  Activity,  —  The  corporation,  like  the  federal 
government,  possesses  only  delegated  powers.  It  may  do 
only  those  things,  and  enjoys  only  such  powers  and  rights 
as  have  been  specifically  delegated  to  it  in  the  charter.  A 
corporation  that  has  been  granted  a  charter  empowering 
it  to  go  into  the  coal-mining  business,  may  not  subsequently 
extend  its  field  of  operations  to  the  manufacture  of  steel 
or  to  railroading.  It  must  confine  its  business  to  that 
specifically  designated  and  defined  in  its  charter.  Further- 
more, a  charter  granted  by  one  state  to  a  corporation  gives 
it  no  rights  in  any  other  state.  The  clause  in  the  Federal 
Constitution  prohibiting  any  state  from  passing  a  law  deny- 
ing to  the  citizens  of  any  state  the  same  rights  and  privi- 
leges as  enjoyed  by  the  citizens  of  the  several  states,  is 
held  by  the  Supreme  Court,  in  the  case  of  Paul  v.  Virginia, 
not  to  apply  to  corporations,  because  corporations,  although 
they  are  persons,  are  not  citizens.    Any  state  may,  there- 


114     SECURITIES-ISSUING    ORGANIZATIONS 

fore,  place  cumbersome  restrictions  on  foreign  corporations; 
that  is  to  say,  on  those  chartered  by  other  states.  The 
same  rule  applies  also  to  alien  corporations  holding  charters 
granted  under  the  laws  of  foreign  nations.  Of  course,  the 
principle  of  mutual  reciprocity  is  quite  generally  followed 
in  the  treatment  accorded  by  any  legal  jurisdiction  to  the 
corporations  of  others.  Indeed,  without  the  general  appli- 
cation of  this  principle  in  the  United  States,  great  diffi- 
culties would  attend  the  use  of  the  corporation  for  business 
purposes  whenever  its  activities  stretched  out  beyond  the 
borders  of  the  state  that  granted  the  charter.  However, 
the  limited  sphere  of  activity  inherent  in  the  corporate  form 
of  organization  is  more  theoretical  than  real  and,  as  we 
shall  see  later,  it  does  not,  in  practice,  become  a  serious 
obstacle  to  its  general  use. 

Ownership  and  Liability.  —  Those  persons,  whether 
natural  or  artificial,  whose  names  appear  on  the  books 
of  the  corporation  as  owners  of  shares  of  its  stocks  are  the 
entrepreneurs  of  the  business.  As  entrepreneurs  they  have 
a  claim  on  the  unencumbered  assets  of  the  corporation, 
but  no  title  to  its  property.  This  is  held  by  the  artificial 
person  of  the  corporation  itself.  As  a  result  of  such  an 
arrangement  there  is  a  double  aspect  to  the  question  of 
assumption  of  risk  or  liability.  The  corporation  itself 
assumes  unlimited  liability,  for  all  of  its  property  may 
be  taken  to  satisfy  the  claims  of  its  creditors.  Among 
these  creditors  we  may  rightfully  place  the  stockholders, 
who  on  dissolution,  are  entitled  to  that  balance  of  the 
assets  remaining  after  all  debts  have  been  paid,  each  stock- 
holder sharing  according  to  the  extent  of  his  holdings.  But 
the  stockholders,  themselves,  as  entrepreneurs,  also  assume 
liability.  Under  common  law  this  was  unlimited,  but  in 
practice  it  was  frequently  unenforceable  upon  each  in- 
dividual stockholder  because  of  practical  difficulties.  The 
principle  of  limited  liability  which  now  applies  to  stock- 


THE    CORPORATION  —  CHARACTERISTICS  115 

holders  is  of  statutory  origin.  It  made  its  appearance  in 
England  during  the  decade  1850-1860,  but  is  found  much 
earlier  in  the  United  States.  In  New  York  it  is  encountered 
as  early  as  1811,  in  Connecticut  in  1817,  and  in  Massachu- 
setts in  1829.  Under  it  the  stockholder  is  liable  only  up 
to  the  face  or  par  value  of  the  stock  that  he  holds.  But  in 
many  states  it  is  now  possible,  through  the  use  of  treasury 
stock,  to  restrict  it  still  further,  namely,  to  w^hat  the  stock- 
holder has  actuall}^  contributed  to  the  corporation,  even 
though  this  may  be  but  a  fraction  of  the  par  value  of  his 
stock.  It  is  this  principle  of  limited  liability,  more  than 
any  other,  that  is  responsible  for  the  bad  repute  that  has 
attached  itself  to  the  corporation  in  America.  Of  recent 
years  some  states,  notably  California  and  Minnesota,  have 
attacked  this  problem  by  providing  for  double  liability 
under  which  the  stockholder  must  pay  the  full  par  value  of 
the  stock  to  the  corporation,  and  in  case  of  bankruptcy,  if 
the  liabilities  exceed  the  assets,  he  may  be  called  upon 
to  contribute  an  additional  amount  up  to  the  limit  of  the 
par  value  of  the  stock  that  he  holds.  Double  liability 
applies  quite  generally  to  stockholders  of  banking  corpora- 
tions throughout  the  United  States ;  but  for  business  corpo- 
rations it  is  restricted  to  the  two  mentioned  states. 

Direction  and  Control.  —  The  direction  and  control  of 
the  corporation  is  vested  in  the  stockholders  and  the  direc- 
tors, while  the  actual  conduct  of  its  daily  business  affairs 
is  a  duty  imposed  upon  its  officers  and  employees. 

The  stockholders  direct  the  policies  of  the  corporation 
only  when  acting  as  a  properly  organized  body,  through  the 
exercise  of  the  voting  power  vested  in  them  by  virtue  of  the 
stock  that  they  own.  For  this  purpose,  each  share  ordi- 
narily is  assigned  one  vote  on  each  proposition  placed  be- 
fore the  stockholders.  It  requires  a  majority  of  votes 
to  carry  a  proposition.  The  stockholders,  while  they 
do  determine  the  broad  general  policy  of  the  corporation, 


116     SECURITIES-ISSUING    ORGANIZATIONS 

have,  as  stockholders,  no  share  in  directing  the  ordinary 
affairs  of  the  corporation,  but  elect  for  this  purpose,  at  an 
annual  meeting,  from  among  their  number  a  board  of 
directors,  for  which  they  may  prescribe  rules  of  conduct  in 
the  form  of  by-laws. 

The  board  of  directors  is  entrusted  with  the  conduct  of 
the  business,  including  the  distribution  of  the  income.  They 
are  responsible  to  the  stockholders  and  the  creditors  for 
any  losses  resulting  from  misconduct  or  violation  of  law  or 
charter  powers  of  the  corporation. 

Officers,  such  as  a  president,  vice-president,  secretary 
and  treasurer,  are  chosen  by  the  board  of  directors.  They 
are  the  agents  through  which  the  corporation  conducts  its 
daily  business.  To  assist  them  in  their  work,  they  employ 
such  other  persons  as  they  deem  necessary. 

The  whole  scheme  or  organization  for  purposes  of  direc- 
tion, as  found  in  the  corporation,  resembles  very  closely  the 
representative  type  of  government  common  to  the  United 
States.  The  stockholders  may  be  viewed  as  the  body  of 
citizens,  the  directors  as  the  legislature,  and  the  officers  as 
the  administrative  officers  of  the  state.  The  chief  differ- 
ence between  them  lies  in  the  method  of  choosing  the  offi- 
cers. The  officers  of  the  state  are  elected  directly  by  the 
people,  while  those  of  the  corporation  are  chosen  by  the 
directors. ^ 

Permanence  and  Stability.  —  One  of  the  most  charac- 
teristic features  of  the  corporation  is  its  remarkable  sta- 
bility, the  result  of  its  continuity  of  existence.  The  term 
of  life  of  the  corporation  is  determined  by  the  charter 
granting  powers,  and  is  in  no  way  dependent  upon  the  life 
of  natural  persons.  The  early  corporations  were,  with  few 
exceptions,  chartered  in  perpetuity.  Under  such  grants, — 
barring  voluntary  dissolution,  bankruptcy,  and  dissolution 

2  While  this  plan  quite  generally  prevails  in  the  United  States,  it 
is  not  universal. 


THE    CORPORATION  —  CHARACTERISTICS  111 

by  court  order  for  violation  of  law,  —  they  may  endure  as 
long  as  the  social  order  continues,  even  though  they  may 
never  function  as  established  businesses.  Corporations 
may,  even  now,  be  chartered  in  perpetuity  under  the  laws 
of  the  state  of  Delaware  and  a  few  others;  but  with  these 
exceptions,  this  practice  has  been  quite  generally  discon- 
tinued, not  only  in  this  country  but  also  abroad.  Under  the 
present  corporation  laws  of  most  of  the  American  states 
and  foreign  countries,  the  term  of  the  charter  is  from 
twenty  to  fifty  years;  but,  as  a  rule,  such  liberal  provisions 
for  renewal  are  made,  that  the  set  period  of  life  may  be 
looked  upon  as  a  provision  designed  to  retain  a  firmer 
control  over  the  corporation,  than  an  absolute  termination 
of  its  existence. 

Exclusive  of  expiration  of  the  charter,  the  corporation 
may  be  dissolved  and  terminated  through  (1)  voluntary 
action  of  the  stockholders,  (2)  bankruptcy  or  insolvency, 
(3)  by  court  decree  in  cases  of  violation  of  law  and  (4) 
by  the  state  for  default  in  complying  with  provisions  of  the 
grant. 

As  a  rule,  in  case  of  bankruptcy  or  insolvency,  the  assets 
of  the  larger  corporations  are  not  sold  at  auction  as  is 
customary  in  the  case  of  personally  owned  enterprises,  but 
the  whole  business  is  turned  over  to  the  creditors,  who  agree 
upon  such  financial  readjustments  as  may  be  deemed  neces- 
sary to  put  the  business  back  on  its  feet.  Such  readjust- 
ments come  technically  under  the  subject  of  corporation 
finance  and  are  called  reorganizations. 

Onerous  Obligations.  —  The  obligations  placed  by  law 
upon  the  corporation,  while  they  may  not  be  onerous,  are, 
nevertheless,  at  times  quite  burdensome.  These  may  be 
properly  classified  under  three  heads  (a)  reports,  (b)  taxes 
and  fees,  and  (c)  regulations  governing  the  operation  of 
the  corporation.  In  Germany,  England  and  a  few  other 
foreign  countries,  they  may  be  considered  as  burdensome 


118     SECURITIES-ISSUING    ORGANIZATIONS 

because  of  the  comprehensiveness,  the  minute  detail  and 
exactness  demanded  in  the  required  reports  to  the  govern- 
ment and  to  the  stockholders,  because  of  the  publicity  re- 
quired, in  matters  of  promotion,  finance  and  operation,  as 
well  as  because  of  the  taxes  and  close  adherence  to  strict 
rules  of  procedure.  In  the  United  States  they  are  burden- 
some more  because  of  their  number  rather  than  for  the 
reason  above  given.  An  enumeration  of  the  more  impor- 
tant of  these  requirements  to  be  found  in  the  United  States 
will  suffice  at  this  place  to  indicate  their  character, 

(a)  Reports: 

1.  Local  tax  reports  —  made  to  local  subdivisions  of  the 

state. 

2.  State  tax  reports  —  made  to  each  state  in  which  the 

corporation  does  business. 

3.  Federal  tax  reports  —  made  to  the  Commissioner  of  In- 

ternal Revenue,  United  States  Treasury  Department. 

4.  Annual  reports  —  made  to  the  secretary  of  state  in  each 

state  in  which  the  corporation  does  business  as  re- 
quired by  that  state.    They  are  for  public  record. 

5.  Sundry  reports  —  made  by  corporations  engaged  chiefly 

in  public  service  enterprises  to  state  service  commis- 
sions and  to  the  Interstate  Commerce  Commission. 

6.  Special  reports  —  made  to  the  Federal  Trade  Commis- 

sion as  required  by  it. 

(6)  Taxes: 

1.  Organization  taxes  payable  to  the  chartering  state. 

2.  Annual  franchise  taxes  payable  to  each  state  in  which 

the  corporation  does  business. 

3.  General  property  tax  payable  to  the  subdivisions  of 

the  state  in  which  the  property  is  located. 

4.  Inheritance  taxes  payable  to  a  few  states  and  to  the 

federal  government. 


THE    CORPORATION  —  CHARACTERISTICS  119 

5.  Income  taxes  payable  to  some  states  and  to  the  fed- 

eral government. 

6.  Other  taxes  and  fees  such  as  a  stock  transfer  tax,  re- 

cording fees,  transcribing  fees,  etc.,  payable  to  the 
state  and  in  some  cases  also  to  the  federal  gov- 
ernment. 

(c)  Regulations  governing  operation: 

These  include  such  reciuirements  as  notices  of  annual 
and  special  meetings  of  stockholders,  notices  of  direc- 
tors' meetings,  and  the  declaration  of  dividends,  etc.; 
as  to  the  kinds  of  books  and  accounts  that  shall  be 
kept,  and  as  to  annual  reports  to  stockholders,  etc. 

Classification  of  Corporations.  —  Not  all  corporations 
exhibit  the  same  features  in  their  organization.  There  is 
no  general  stereotyped  form  that  serves  equally  well  for  all 
purposes.  The  corporation  has  been  put  to  such  a  great 
diversity  of  uses  that  it  became  advisable  to  classify  them 
for  legal  and  legislative  purposes. 

The  first  basis  of  classification  rests  upon  the  object  for 
which  the  corporation  is  to  be  formed.  Three  such  objects 
have  become  generally  recognized.  First,  the  corporation 
is  found  to  be  very  useful  in  organizing  for  governmental 
purposes,  as  cities,  counties,  towns,  school  districts,  and 
other  political  subdivisions  of  the  state.  These  are  known 
as  municipal  corporations.  Not  being  organized  for  profit, 
they  issue  no  stock,  but  may,  and  usually  do  issue  bonds. 

The  second  class  is  distinguished  by  its  social,  rather 
than  political  object.  It  includes  churches,  schools  and 
libraries,  clubs,  lodges  and  fraternities,  and  charitable  or- 
ganizations. Here  also,  the  object  is  not  private  financial 
gain  or  profit,  but  an  intangible  social  benefit.  This  bene- 
fit cannot  be  measured,  and  consequently  the  corporation 
has  no  use  for  stock,  which  serves  merely  as  a  conven- 
ient medium  whereby  to  distribute  the  benefits  that  accrue 


120     SECURITIES-ISSUING    ORGANIZATIONS 

to   the   participants.     This   type    is    called    eleemosynary 
corporations. 

The  third  class  includes  all  corporations  organized  for 
profit.  These  are  commonly  referred  to  as  business  corpo- 
rations. They  all  issue  stock,  and  usually  also  bonds.  For 
purposes  of  greater  effectiveness  of  control  through  statutes, 
they  are  grouped  according  to  the  field  of  their  operations 
as  industrial,  commercial,  public  service  and  financial  cor- 
porations; and  in  each  of  these  groups  are  several  types. 


Classification  of  Corporations 
A.   Non-stock  corporations 


1.   Municipal 


2.   Eleemosynary  { 


cities 
counties 
school  districts 
towns,  etc. 

churches 

hospitals 

schools  and  libraries 

clubs,  lodges  and  fraternities 

charitable  institutions 


B.   Stock  Corporations 


3.   Business 


Industrial 


j  Manufacturing 
\  Mining 


_  .  ,  f  Wholesaling 

Commercial  |  Retailing 


Public 
Service 


Financial 


Railroads 
Street  railways 
Gas,  heat  and  light  companies 
Telephone     and      telegraph 
companies 

(Banks 
Trust  companies 
Insurance  companies 


Advantages  and   Disadvantages.  —  From   the   foregoing 
brief   description  of  the   corporate   form  of  organization, 


THE    CORPORATION  —  CHARACTERISTICS    121 

its  advantages  and  disadvantages,  as  they  present  them- 
selves to  the  entrepreneur,  have  become  apparent. 
Its  advantages  may  be  summarized  as  follows: 

(1)  Flexibility.  It  lends  itself  as  readily  to  small  as  to 
large  undertakings  because  the  numbers  of  entrepreneur? 
or  owners  that  may  participate  in  it  can  be  large  or  small ; 
its  business  operations  can  readily  be  contracted  or  ex- 
tended through  the  simple  expedient  of  charter  amendment, 
and  it  has  within  easy  reach  the  vast  reservoir  of  the  in- 
vestable  capital  of  nations,  which  enables  it  to  collect  large 
amounts  of  capital  in  the  form  of  small  contributions  from 
a  great  number  of  investors. 

(2)  Stability  and  permanence.  Unlike  the  personal 
ownership  types  of  entrepreneurial  organization,  its  be- 
ing is  not  dependent  upon  the  lives  of  the  entrepreneurs  nor 
yet  subject  to  their  capricious  whims,  but  it  enjoys  a  defi- 
nite term  of  life  which,  at  its  expiration,  is  easily  extended. 

(3)  Transferability  of  ownership  interest.  The  quality 
of  transferability  inherent  in  the  securities  that  it  issues, 
makes  it  possible  for  the  entrepreneur  easily  to  withdraw 
from  the  enterprise  without  in  the  least  disturbing  the  or- 
ganization. There  is  usually  a  ready  market  for  the  stock 
in  large  or  small  quantities. 

(4)  Limited  Liability.  The  entrepreneur  can  definitely 
predetermine  and  limit  the  risk  of  loss  that  he  assumes. 
This  he  cannot  do  under  the  personal  ownership  types,  or 
even  under  the  joint  stock  company. 

(5)  Centralized  control.  The  personal  ownership  types 
of  organization  do  not  permit  of  the  association  of  a  large 
number  of  entrepreneurs  in  a  single  enterprise,  nor  do  they 
offer  the  same  facility  in  attaching  specialists  to  the  busi- 
ness through  the  entrepreneurial  bond.  The  corporation, 
however,  does  offer  these  opportunities,  and  in  addition  it 
furnishes  the  mechanism  whereby  the  control  of  the 
greatest  and  most  ramified  undertakings  may  be  cen- 
tralized in  the  hands  of  a  relatively  small  group. 


122     SECURITIES-ISSUING    ORGANIZATIONS 

The  disadvantages  also  have  been  touched  upon.  They 
are  here  briefly  summarized. 

(1)  Government  regulation.  The  corporation  as  a 
creature  of  the  state  is  subject  to  constant  regulation.  This 
in  itself  would  not  be  a  serious  disadvantage  were  it  not 
for  the  fact  that  at  practically  every  session  of  the  state 
legislature  existing  laws  and  regulations  are  changed,  or 
entirely  new  ones  adopted.  The  policy  of  states  in  this 
respect  shifts  from  laxity  to  aggressive  regulation  and  re- 
striction according  to  prevailing  public  sentiment.  Hence, 
it  is  impossible  to  forecast  from  one  year  to  the  next  what 
these  regulations  will  be. 

(2)  Greater  burden  of  fees  and  taxes.  The  corporation 
must  pay  to  the  states  in  which  it  operates  and  to  the 
federal  government  many  kinds  of  taxes  and  fees  from 
which  the  personal  ownership  types  of  organization  are 
exempt.  Not  least  among  these  is  the  initial  expense  of  the 
organization  tax  and  the  annual  franchise  tax  which  it  must 
pay  to  continue  its  existence. 

(3)  Restricted  sphere  of  activity.  The  corporation  may 
do  only  those  things  that  it  is  specifically  authorized  to  do, 
while  the  entrepreneurs  in  the  personal  ownership  organiza- 
tions may  do  anything  that  is  not  specifically  prohibited. 
The  former  operates  by  permission  and  the  latter  by  right. 

(4)  Limited  credit.  In  theory  the  limited  liability  en- 
joyed by  the  stockholder  of  a  corporation  should  work  to 
restrict  the  credit  that  may  be  extended  to  the  corpora- 
tion to  an  amount  determined  very  largely  by  the  selling 
value  of  the  assets  or  the  capitalized  net  earnings.  Other 
things  being  equal,  the  same  business,  where  operating 
under  a  corporate  form,  should  not  enjoy  the  same  high 
credit  standing  that  it  would  have  as  a  partnership.  But 
in  practice,  this  theory  does  not  always  hold;  and  fre- 
quently, in  spite  of  the  limited  liability,  the  corporation 
has  a  better  credit  standing  than  a  partnership  would  have. 


THE    CORPORATION  —  CHARACTERISTICS  123 

This  is  more  particularly  true  of  corporations  operating 
large  undertakings  whose  bond  issues  often  exceed  the  sell- 
ing value  of  the  properties  under  their  control.  For  ex- 
ample the  old  United  States  Shipbuilding  Company  issued 
$24,500,000  in  bonds  against  assets  valued  at  less  than 
$16,000,000.3 

8  Dewing,  Corporate  Promotions  and  Reorganizations. 


CHAPTER   VIII 

CORPORATE  SECURITIES  AND  CAPITALIZATION 

The  Corporate  Securities 

General.  —  The  corporate  securities,  like  all  types  of 
securities,  are  of  two  general  classes,  namely,  those  that 
represent  an  ownership  interest  in  the  business,  and  those 
that  represent  a  creditor's  interest.  The  former  are  called 
stocks  and  the  latter  notes  and  bonds.  Of  each  class,  there 
are  numerous  kinds  exhibiting  all  shades  of  characteristics 
that  permit  of  gradual  gradation  from  stocks  to  bonds ;  but 
there  is,  nevertheless,  a  fairly  well  recognized  line  of  cleav- 
age between  them. 

Capital  Stock.  —  The  number  of  shares  of  stock  that  the 
charter  authorizes  the  corporation  to  issue  is  its  capital 
stock.  It  is  usually  expressed  in  terms  of  money,  in  which 
case  the  charter  will  further  state  the  number  of  shares 
into  which  it  is  divided.  Thus  we  find  in  the  charter  of 
the  Midvale  Realty  Corporation  the  following  clauses: 

"  Third.  —  The  amount  of  capital  stock  of  said  corporation 
shall  be  One  Million  Dollars  ($1,000,000). 

Fourth.  —  The  number  of  shares  of  which  said  capital  stock 
is  to  consist  shall  be  Ten  Thousand  (10,000)  shares  of  the  par 
value  of  One  Hundred  Dollars  ($100)  each." 

Such  shares  are  said  to  have  a  par  value,  that  is,  a  nominal 
value  assigned  to  each  share.  A  common  practice  is  to 
assign  a  par  value  of  $100  to  each  share,  but  this  is  a 
matter  of  choice  within  the  limits  fixed  by  provisions  of 
law.     The  shares  of  stock  of  the  Pennsylvania  Railroad 

124 


THE    CORPORATION  —  SECURITIES,    ETC.  123 

have  a  par  value  of  $50,  while  those  of  the  Carnegie  Steel 
Company  were  $1,000  each.  Under  the  laws  of  the  state 
of  New  York  the  par  value  must  be  $5,  or  multiples  of  that 
figure,  which  permits  of  considerable  variation  in  this 
matter.  Other  states  permit  of  the  issue  of  stock  of  a 
nominal  par  value;  for  example,  the  Wind  River  Refining 
Company,  a  Maine  corporation,  has  a  share  with  a  par 
value  of  only  one  mill. 

In  many  of  the  states  it  is  now  permissible  under  statute 
law,  to  state  in  the  charter  merely  the  number  of  shares  of 
which  the  capital  stock  is  to  consist,  without  assigning  to 
each  share  any  par  or  nominal  value  whatever.  These 
shares  are  known  as  shares  without  par  value,  or  non-par 
value  shares.  A  good  example  of  such  a  law  is  that  of 
New  York.  This  type  of  share  is  rapidly  gaining  favor, 
for,  as  one  writer  ^  puts  it,  "  It  is  argued  that  such  shares 
lacking  the  '  price  ticket '  of  a  nominal  value,  will  force  the 
investing  public  to  investigate  the  real  value  of  the 
enterprise  and  the  real  probability  of  profits,  and  thus  de- 
termine the  real  value  of  the  shares  much  more  surely 
and  quickly  than  under  the  present  system  of  valued 
shares."  In  most  states,  the  incorporators  are  not  restricted 
to  the  exclusive  use  of  either  the  one  type  or  the  other, 
but  may  use  both. 

Issued  and  Unissued  Stock.  —  The  stock  of  the 
corporation  does  not,  merely  by  virtue  of  a  charter 
provision  authorizing  it,  exercise  an  effective  claim  on 
the  income  of  the  corporate  business.  To  do  so  it 
must  be  sold  by  the  corporation,  or  be  given  in  ex- 
change for  services  or  property.  By  this  means  does 
the  corporation  make  connection  with  entrepreneurs 
who  are  called  stockholders.  The  stock  that  is  so  given 
out  by  the  corporation  is  called  issued  stock,  while  the  bal- 

1  Thomas  Conyngton,  Corporate  Organization  and  Manage* 
meni,  p.  70. 


126     SECURITIES-ISSUING    ORGANIZATIONS 

ance  of  the  authorized  capital  stock  is  unissued.  The 
United  States  Steel  Corporation  began  life  with  an 
authorized  capital  stock  of  $1,100,000,000;  and  at  the  end 
of  the  first  year  had  issued  $1,018,583,600,  the  difference 
being  unissued.  The  unissued  stock  forms  a  reserve  which 
may  be  sold  on  the  market  to  secure  additional  funds  or 
may  be  otherwise  disposed  of  as  the  stockholders  may  see 
fit,  so  long  as  they  remain  within  the  law. 

The  Stock  Certificate.  —  The  instrument  that  is  placed 
in  the  hands  of  the  stockholder  as  an  evidence  of  his  owner- 
ship of  issued  shares  of  stock  is  the  stock  certificate.  It 
usually  sets  forth  the  name  of  the  corporation,  the  state  of 
incorporation,  the  authorized  capital  stock,  the  par  value 
of  the  shares,  the  name  of  the  holder,  the  number  of  shares 
represented  by  the  certificate,  requirements  as  to  transfer 
of  ownership,  the  date  of  issue,  the  number  of  the  certifi- 
cate and  the  signatures  of  such  officers  of  the  corporation 
as  may  be  required  by  the  charter  or  by-laws.  If  the 
stock  possesses  any  special  feature,  these  are  usually  also 
printed  on  the  face  of  the  certificate.  On  the  back  of  each 
certificate  is  a  form  to  be  filled  in  to  effect  a  transfer  of 
ownership.^ 

Full-Paid  and  Part-Paid  Stock.  —  If  the  corporation,  in 
exchange  or  payment  for  its  stock,  has  received  money, 
property  ot  services  whose  fair  market  value,  in  the  best 
judgment  of  the  directors,  equals  the  face  value  of  the 
stock,  then  the  stock  is  said  to  be  full  paid.  The  corpora- 
tion ordinarily  also  gives  up  any  privilege  it  might  have  of 
levying  assessments  upon  the  stockholder  in  case  it  gets 
into  diflEiculties.  Most  stock  is  issued  as  full  paid  and  non- 
assessable, by  virtue  of  which  the  stockholder's  liability 
toward  the  corporation  will  have  been  satisfied  in  full.  It 
frequently  happens,  however,  that  stock  is  issued  as  full 
paid  and  non-assessable,  when  in  fact  the  corporation  may 
2  See  Forms  21-24,  Part  VI. 


THE    CORPORATION  —  SECURITIES,    ETC.  127 

not  have  received  for  it  anything  approaching  the  par 
value  of  the  stock.  In  such  cases  the  liability  of  the  stock- 
holder toward  the  corporation  itself,  in  the  absence  of 
fraud,  has  been  fully  met,  but  the  creditor  of  the  corpora- 
tion, if  he  cannot  satisfy  his  claim  out  of  the  corporate 
assets,  may  sue  to  recover  from  the  stockholders  sums  equal 
to  the  difference  between  the  actual  value  of  what  they  paid 
the  corporation  for  its  stock,  and  the  par  value  of  their 
shares.  To  illustrate:  If  stock  that  has  a  par  value  of 
$100  per  share  is  sold  by  the  corporation  for  $80  per  share 
as  full-paid  and  non-assessable,  the  corporation  cannot 
subsequently  demand  the  difference  of  $20  of  the  stock- 
holder, but  the  creditor  of  the  corporation  has  a  legal  right 
to  do  so.  When  property  or  services  have  been  given  in 
payment  for  the  stock,  the  corporation  is  entitled  to  exer- 
cise its  judgment  as  to  the  reasonable  value  of  the  property 
or  services  received.  When  such  stock  is  issued  it  is  some- 
times hard  to  prove  that  the  stock  is  not  full  paid.  Stock 
of  this  character,  that  has  been  issued  without  the  receipt 
of  an  adequate  supporting  value  by  the  corporation,  is 
commonly  called  ivatered  stock.  In  several  of  the  states 
the  directors,  whose  duty  it  is  to  issue  stock,  are  made  per- 
sonally liable,  not  only  to  the  creditors,  but  also  to  the 
corporation  for  the  issuance  of  part-paid  stock.^ 

A  stockholder  who  is  not  the  original  subscriber,  but 
who  has  purchased  stock  for  which  the  full  par  value  was 
not  paid,  and  the  stock  is  marked  full  paid  and  non-assess- 
able, is  not  liable  to  creditors  for  the  unpaid  balance  if  he 
has  no  knowledge  of  the  fact  that  it  was  not  fully  paid. 
The  liability  in  such  cases  remains  with  the  original  sub- 
scriber, or  is  lost.  If  he  has  knowledge  of  the  conditions 
under  which  it  was  issued  he  is  liable. 

Treasury  Stock.  —  Stock  that  has  once  been  issued  as 
full  paid  and  non-assessable,  when  acquired  by  the  issuing 

3  See  the  Laws  of  Vermont  and  New  York. 


128     SECURITIES-ISSUING    ORGANIZATIONS 

corporation  by  purchase,  gift,  bequest  or  exchange,  is  called 
treasury  stock.  Only  in  those  states  that  permit  a  cor- 
poration to  own  its  own  securities  is  it  possible  to  have 
treasury  stock  *  Such  stock,  when  again  sold  by  the  cor- 
poration for  less  than  its  par  value,  does  not  impose  upon 
the  purchaser  a  liability  as  in  case  of  part-paid  stock. 
This  holds  even  as  between  the  purchaser  and  the  creditor 
of  the  corporation.  This  principle  is  frequently  taken  ad- 
vantage of  in  forming  mining  corporations.  The  owner  or 
owners  of  a  mining  claim  will  form  a  corporation  and  ex- 
change the  claim  for  all  of  the  corporation's  capital  stock. 
In  order  to  secure  additional  funds  for  development  pur- 
poses, a  large  block  of  the  stock  is  given  back  to  the  cor- 
poration, which  sells  it  for  what  it  will  bring.  It  is  quite 
obvious  that  this  practice,  where  permitted  under  state 
laws,  makes  a  mere  fiction  of  full  paid  stock. 

Stock  Classification.  —  It  is  frequently  deemed  desira- 
ble by  the  incorporators  to  provide  for  several  classes  of 
stock.  The  bases  of  classifications  of  this  kind  are  the  risk 
factor  assumed  by  the  stockholder  and  the  degree  of  con- 
trol that  he  exercises.  A  very  common  arrangement  is  to 
provide  for  two  classes  in  the  charter,  namely,  common 
stock  and  preferred  stock. 

Common  Stock 

The  securities  that  vest  in  their  holder  title  to  the  other- 
wise unencumbered  or  unpledged  income  and  assets  of  the 
corporation,  are  called  its  common  stock.  Attendant  upon 
its  ownership  is  the  assumption  of  the  first  risk  of  loss, 
arising  from  the  fact  that  the  holders  of  other  securities  of 
the  corporation  are  given  a  preferred  claim  on  income,  and 
usually  also  on  assets.  The  common  stockholder's  interest 
in  the  business  of  the  corporation  is  thus  in  the  nature  of 
a  final  equity  coupled  with  power  of  control. 

*  The  laws  of  Missouri  do  not  permit  the  corporation  to   own 

its  own  securities. 


THE    CORPORATION  —  SECURITIES,    ETC.    129 

Rights  of  the  Common  Stockholder.  —  The  characteris- 
tics of  common  stock  are  perhaps  best  brought  out  by  a 
consideration  of  the  rights  that  become  vested  in  a  per- 
son by  virtue  of  the  ownership  of  a  share  of  such  stock. 
These  include  the  following: 

(a)  Voice  in  direction.  For  each  share  of  common 
stock  held  by  him,  the  stockholder  is  entitled  to  cast  one 
vote  on  each  proposition  laid  before  the  general  body  of 
stockholders,  be  it  the  election  of  directors  or  the  deter- 
mination of  some  financial  or  other  policy.  This  voice  in 
the  direction  of  the  corporation  is  a  right  inherent  in  the 
entrepreneur  and  is  alienable  only  with  his  consent.  The 
right  to  vote  may  be  exercised  in  person  or  may  be  dele- 
gated to  another  by  execution  of  a  power  of  attorney, 
called  a  proxy. 

(b)  Notice  of  meetings  of  stockholders.  To  make 
effective  his  right  to  vote,  the  stockholder  has  furthermore 
the  right  to  be  notified  of  the  time,  place  and  purpose  of 
meetings  of  the  body  of  stockholders. 

(c)  Information.  As  an  entrepreneur,  the  common 
stockholder  is  entitled  to  inform  himself  of  the  condition 
of  the  business.  He  has  the  right  to  demand  such  financial 
and  other  reports  as  may  be  prescribed  in  the  state  laws, 
or  in  the  charter  and  by-laws  of  the  corporation.  In  addi- 
tion to  this,  he  has  a  limited  right  to  inspect  the  books  of 
the  corporation.  Under  common-law  rules  this  last  was 
an  absolute  right,  but  in  modern  practice  it  is  generally 
limited  to  prevent  the  stockholder  from  interfering  with 
the  conduct  of  the  business  and  from  exercising  the  privi- 
lege for  purposes  other  than  of  informing  himself  of  the 
condition  of  the  business.  The  reason  for  this  restriction 
is  obvious.  If  it  were  not  imposed,  what  would  prevent 
an  officer  of  a  competing  corporation  from  purchasing  a 
share  of  stock  of  his  competitor  and  thereby  enjoying  the 
privilege  of  informing  himself  as  to  amount  cf  its  business, 


130     SECURITIES-ISSUING    ORGANIZATIONS 

the  location  and  names  of  its  customers,  etc.?  The  courts, 
ill  enforcing  this  right,  usually  look  into  the  motive  behind 
it  rather  than  to  the  bare  right  itself. 

{d)  Bight  to  participate  in  profits.  That  part  of  the 
income  of  the  business  that  remains  as  a  surplus  after  all 
expenses  and  current  creditors'  claims  have  been  paid  and 
sufficient  funds  to  keep  up  the  assets  of  the  business  have 
been  set  aside,  is  ordinarily  considered  to  be  the  net  profit. 
This,  in  the  corporation,  belongs  to  the  stockholders  to  be 
distributed  on  the  basis  of  shares  owned.  The  common 
stockholder  has  a  claim  on  these  profits  only  to  the  ex- 
tent to  which  they  remain  unpledged  to  other  stockholders. 
The  distribution  of  the  profits  can  take  place  only  by  the 
declaration  of  dividends  by  the  directors,  but  when  divi- 
dends have  once  been  declared  the  stockholder  has  a  right 
to  demand  and  to  receive  them  from  the  corporation.  Thej'' 
may  not  be  withheld  from  him.  Thus  the  right  of  the 
common  stockholder  to  dividends,  while  it  cannot  be 
denied,  is  contingent  upon  the  satisfaction  of  all  prior  or 
preferred  rights. 

(e)  Right  freely  to  dispose  of  shares.  Since  one  of  the 
inherent  characteristics  of  securities  is  that  they  are  freely 
transferable,  the  common  stockholder  enjoys  the  right  to 
sell,  give,  devise  or  bequeath  his  shares  of  stock  to  another. 
Such  a  transfer  carries  with  it  all  rights,  privileges  and 
preferences  enjoyed  by  the  transferer  by  virtue  of  owner- 
ship of  shares. 

The  Stockholder's  Liability.  —  The  liability  arising  out 
of  the  ownership  of  stock  of  a  corporation  has  been  indi- 
cated here  and  there.  It  may  be  well  at  this  point  to  sum- 
marize it. 

1.  His  liability  is  limited  and  is  easily  measured. 

2.  He  may  lose  up  to  the  par  value  of  stock  subscribed  for  and 

purchased  or  what  he  has  actually  paid  for  non-par  value 
stock. 


THE    CORPORATION— SECURITIES,    ETC.    131 

3.  He  may  be  called  upon  to  pay  to  the  creditors  of  the  corpo- 
ration the  unpaid  balance  on  part-paid  stock. 

4.  He  may  be  called  upon  to  pay  to  the  creditors  a  sum  equal 

to  the  par  value  of  the  stock  that  he  holds  if  he  holds 
stock  in  national  or  state  banks. 

5.  He  can  be  forced  to  reimburse  the  corporation  or  its  credi- 

tors for  any  dividends  paid  out  of  assets  or  declared  when 
the  corporation  was  insolvent. 

6.  He  is  liable,  in  most  states,  for  his  proportionate  share  of 

wages  owed  to  employees  in  case  of  insolvency. 

Classification  of  Common  Stock.  —  Although  not  very 
general,  classification  of  common  stock  is  sometimes  re- 
sorted to.  For  example,  tw^o  classes  might  be  made.  Class 
A  consisting  of  a  given  number  of  shares  and  entitled  to 
elect  two  members  to  the  board  of  directors,  and  Class 
B  entitled  to  elect  but  one  member  to  the  board  of  direc- 
tors. Such  classifications  are  frequently  employed  to  in- 
sure control  on  the  same  basis  that  existed  in  a  partner- 
ship when  it  is  transformed  into  a  corporation  to  secure 
the  advantage  of  the  latter  form  of  organization.  Classi- 
fication of  common  stoclc  by  large  corporations  is  ex- 
tremely rare  as  it  tends  to  give  a  preference  that  can  be 
better  and  more  minutely  expressed  by  means  of  pre- 
ferred stock. 

Preferred  Stock 

Stock  that  is  distinguished  from  the  common  stock  of 
the  same  corporation  by  conferring  upon  the  holder  special 
or  preferred  rights,  not  enjoyed  by  the  common  stockholder, 
is  called  preferred  stock.  It  is  the  generally  accepted  rule 
that  preferred  stock  vests  in  the  holder  all  of  the  rights 
that  he  would  possess  as  a  common  stockholder,  and  in 
addition  thereto  such  rights  and  privileges  as  are  specifi- 
cally conferred,  together  with  such  restrictions  as  may 
be  imposed  upon  him  under  the  charter  provisions  creating 


132     SECURITIES-ISSUING    ORGANIZATIONS 

the  class  of  preferred  stock  that  he  owns.  It  is  essentially 
common  stock  with  certain  definitely  described  privileges 
and  restrictions  added. 

From  what  has  been  said  of  the  rights  of  the  common 
stockholder,  it  is  plain  that  a  great  many  varieties  of  pre- 
ferred stock  can  be  brought  into  use.  However,  in  practice 
this  does  not  seem  to  have  been  the  general  result.  A  few 
more  or  less  standardized  types,  based  quite  largely  upon 
preference  as  to  dividends  and  assets,  have  been  widely 
used;  but  only  occasionally  are  types  with  distinctive  fea- 
tures other  than  these  found.  The  following  examples  of 
preferences  and  restrictions,  while  by  no  means  exhaus- 
tive, indicate  the  characteristics  of  the  more  common  types 
of  preferred  stock. 

Preference  as  to  Dividends.  —  Preferred  stock  may  be 
given  preference  as  to  dividends  alone  b}'  some  such  clause 
as  this:  "The  holders  of  the  preferred  stock  shall  be  en- 
titled to  receive,  when  and  as  declared,  from  the  surplus 
or  net  profits  of  the  corporation  dividends  at  the  rate  of 
seven  per  centum  and  no  more."  Such  stock  possesses  three 
distinctive  features;  first,  its  holder  must  receive  dividends 
before  the  common  stockholder  is  entitled  to  any;  second, 
the  dividend  must  be  equal  to  seven  per  cent  of  the  par 
value  of  the  stock,  and  third,  it  cannot  exceed  seven  per 
cent  even  though  enough  profits  remain  to  declare  dividends 
of  more  than  seven  per  cent  on  common  stock.  Further- 
more, the  directors  are  under  no  obligation  to  declare  divi- 
dends annually,  but  may  allow  earnings  to  accumulate  so 
that  when  dividends  are  declared  the  common  stockholder 
may  receive  far  more  than  the  preferred  stockholder. 

If,  however,  the  word  "  annual  "  be  inserted  before  the 
word  "  dividends,"  the  result  would  be  to  require  the  di- 
rectors to  declare  dividends  annually,  if  earned,  and  the 
preferred  stockholder  should  under  good  management  re 
eeive  his  seven  per  cent  annually. 


THE    CORPORATION  —  SECURITIES,    ETC.    133 

If  a  further  change  is  made  by  striking  out  the  words 
"  and  no  more,"  the  seven  per  cent  would  become  a  mini- 
mum instead  of  a  maximum  dividend  rate,  and  the  pre- 
ferred stockholder  would  participate  in  dividends  if  the  net 
earnings  permitted  of  a  dividend  of  more  than  seven  per 
cent  on  both  preferred  and  common  stock.  Both  classes 
would  receive  the  same  rate  in  that  case.  Thus  the  words 
"  and  no  more  "  make  it  non-participating  preferred  stock. 

Frequently  it  is  found  desirable  to  assure  the  preferred 
stockholder  of  a  specified  annual  rate  of  dividend  on  the 
par  value  of  his  stock  by  providing  that  "  if  in  any  year 
the  stipulated  dividend  rate  shall  not  have  been  paid,  the 
deficiency  shall  be  payable  before  any  dividends  shall  be 
paid  or  set  apart  for  the  common  stock."  In  other  words, 
the  preferred  stockholder's  claim  to  a  stipulated  dividend 
on  his  stock  does  not  run  from  year  to  year,  but  if  not! 
satisfied  in  any  year  carries  over  from  one  year  to  the  next 
and  so  on  until  it  is  finally  paid.  This  type  of  preferred 
stock  is  called  cumulative. 

Preference  as  to  Assets.  —  Preference  to  share  in  assets 
upon  dissolution  of  the  corporation  is  frequently  given  to 
preferred  stock,  particularly  to  the  cumulative  type.  The 
two  preferences  combined  make  a  very  useful  stock  because 
of  the  relative  ease  with  which  it  can  be  sold  on  the  mar- 
ket or  be  given  in  exchange  for  properties  or  stocks  of 
corporations  that  are  to  be  consolidated  or  combined. 

Voting  Power.  —  Preferred  stock  is  frequently  denied  the 
right  to  vote  on  the  theory  that  the  preference  granted  is 
sufficient  to  compensate  the  holder  for  giving  up  his  right  of 
control.  Frequently  a  contingent  voting  power  is  conferred, 
by  which  the  preferred  stockholders  are  empowered  to 
supplant  the  common  stockholders  in  the  control  of  the 
corporation  whenever  the  earnings  are  insufficient  to  pay 
the  preferred  dividends  in  full.  The  control  then  remains 
in  the  hands  of  the  preferred  stockholders  until  all  ac- 


134     SECURITIES-ISSUING    ORGANIZATIONS 

cumulated  dividends  have  been  paid,  wlien  it  reverts  to 
the  common  stockholder.  In  other  cases,  the  preferred 
stockholders  are  given  the  right  to  elect  a  certain  number  of 
members  to  the  board  of  directors,  for  example,  one  or  two 
of  a  board  of  five.  Still  another  arrangement  that  is  some- 
times resorted  to,  is  to  give  each  of  the  two  classes  of  com- 
mon and  preferred  stock  equal  voting  power,  regardless 
of  the  number  of  shares  of  each  that- are  outstanding.  It 
may  also  be  provided  that  no  mortgage  or  other  encum- 
brance shall  be  created  without  the  consent  of  a  substan- 
tial majority  of  the  outstanding  preferred  stock. 

Other  Features.  —  Incorporators  frequently  provide  for 
the  issue  of  preferred  stock  as  a  temporary  loan.  In  such 
cases  it  is  issued  with  the  proviso  that  it  may,  at  the  will 
of  the  directors  or  common  stockholders,  be  redeemed  or  re- 
tired by  the  corporation  upon  payment  of  the  par  value, 
plus  ten  to  fifteen  per  cent,  and  all  accrued  dividends.  A 
sinking  fund  based  on  a  percentage  of  the  par  value  of  the 
outstanding  preferred  stock,  may  be  provided  for  purposes 
of  redemption.  This  type  is  called  redeemable  preferred 
stock,  and  also  frequently  debenture  stock,  as  in  the  General 
Motors  Company. 

Another  practice  is  to  issue  it  subject  to  conversion  into 
any  other  security,  such  as  bonds  or  common  stock,  that 
may  be  considered  more  attractive  to  the  investor.  Such 
stock  is  known  as  convertible  stock. 

Preferred  Stock  of  No  Par  Value.  —  While  stock  with- 
out par  value  is  usually  common  stock,  it  is  permitted, 
under  the  laws  of  a  few  states,  to  issue  preferred  stock  with- 
out par  value.  This  has  been  made  possible  only  within 
the  last  few  years,  and  as  yet  little  of  this  type  of  stock 
has  been  employed  in  corporate  capitalizations.' 

5  Descriptions  of  examples  of  preferred  stock  actually  in  use  that 
combine  one  or  more  of  the  features  described  above  are  given 
in  Pnrt  VI.  in  Forms  10  to  23.  and  should  be  carofullv  studied 
by  the  student  so  that  he  may  familiarize  himself  with  the  way 
in  which  these  features  are  combined  in  practice. 


THE    CORPORATION  —  SECURITIES,    ETC.    135 

Founders'  Shares.  —  In  England  a  special  kind  of  pre- 
ferred stock  known  as  "  founders'  shares  "  has  been  fre- 
quently employed  in  order  to  favor  those  who  launch,  or 
are  among  the  first  to  invest  in,  the  new  corporate  enter- 
prise. The  preference  given  the  holders  of  founders'  shares 
is  usually  based  on  a  given  per  cent  of  the  sum  total  of 
net  earnings  available  for  distribution  as  dividends  on 
common  stock.  For  example,  a  corporation  with  an 
authorized  capital  stock  of  $500,000  has  $150,000  in  pre- 
ferred stock  and  $350,000  in  common  stock.  Of  the  latter, 
$50,000  are  in  founders'  shares  the  holders  of  which  are 
entitled  to  receive  one-third  or  one-half  of  the  distributable 
net-profits  remaining  after  every  class  of  security-holders, 
other  than  common  stockholders,  has  been  satisfied.  In  the 
United  States  little  use  has  been  made  of  this  type  of 
security.  The  reason  for  this  is  twofold.  In  the  first  place, 
the  same  classification  of  security-holders  may  be  secured 
by  means  of  carefully  selected  types  of  preferred  stock, 
and  secondly,  the  laws  of  our  states  have  not  been  suffi- 
ciently interpreted  by  the  courts  to  insure  the  validity  of 
issues  of  founders'  shares.  The  laws  of  New  Jersey  and 
many  other  states,  however,  would  seem  to  permit  of  their 
use,  and  at  least  one  large  corporation,  the  United  Retail 
Stores  Company,  organized  within  the  past  few  years 
has  employed  founders'  shares  with  considerable  success. 
Founders'  shares  are  frequently  made  redeemable.  This 
practice  is  common  in  France. 

Bonds  and  Corporate  Notes 

The  corporate  bond  is  a  security  to  which  attaches  a 
creditor's  interest  in  the  corporation  carrying  with  it  a 
claim  on  income  and  property.  It  is  distinguishable  from 
stock,  in  that  its  holder  ordinarily  exercises  no  control 
through  voting  power  over  the  business  so  long  as  the 
corporation  meets  its  obligations  to  him  as  they  fall  due. 


136     SECURITIES-ISSUING    ORGANIZATIONS 

The  risk  of  loss  assumed  by  the  bondholder  is,  in  theory, 
and  usually  in  practice,  relatively  less  than  that  assumed 
by  the  stockholder;  but,  as  the  intensity  of  this  factor  is 
dependent  upon  the  nature  of  the  support  back  of  the  in- 
terest and  principal  of  the  loan,  here  the  same  characteris- 
tic of  gradation  as  found  in  preferred  stock  also  applies. 
Thus,  while  in  principle,  a  clear  distinction  or  line  of  cleav- 
age is  seen  to  differentiate  bonds  from  stocks  in  the  matter 
of  claim  on  income,  risk  assumed  and  control  exercised  by 
the  holder,  in  practice  these  distinctions  are  reduced  from 
the  absolute  to  the  relative.  The  result  is  the  existence 
of  a  serrated  scale  of  securities,  ranging  from  common 
stock  at  one  end  to  mortgage  bonds  at  the  other,  permit- 
ting of  all  degrees  of  differentiation  in  respect  to  claims  on 
income  and  assets,  risk  and  control. 

Structural  Elements  of  the  Bond.  —  In  order  to  under- 
stand clearly  just  what  place  the  bond  occupies  among  the 
corporate  securities  and  what  rights,  privileges  and  powers 
the  bondholder  enjoys  in  the  corporation,  it  will  be  neces- 
sary to  analyze  the  elements  that  determine  the  character 
of  any  bond.  Five  such  structural  elements  enter  into  the 
construction  of  every  bond,  namely,  (1)  the  nature  of  the 
covenant  creating  the  bondholder's  claim  on  income  and 
assets;  (2)  the  nature  of  the  supporting  value  back  of  the 
principal;  (3)  the  manner  in  which  payment  of  interest 
and  principal  is  to  be  made;  (4)  the  nature  of  the  power  of 
foreclosure  and  assumption  of  control,  and  (5)  the  purpose 
for  which  the  bond  has  been  issued. 

By  no  means  is  each  of  the  enumerated  elements  em- 
ployed in  the  building  of  every  bond  in  exactly  the  same 
way,  or  with  the  same  degree  of  importance  or  emphasis. 
From  this  it  follows  that  the  variety  of  bonds  that  may  be 
issued  is  exceedingly  great;  but  as  in  the  case  of  preferred 
stock,  the  bond  issues  have  in  practice  been  quite  largely 
confined  to  a  few  more  or  less  common  types,  a  factor 


THE    CORPORATION  —  SECURITIES,    ETC.  137 

that  favorably  influences  their  vendibility.  The  possibili- 
ties in  the  matter  of  varieties  of  each  well  recognized  type 
are  made  apparent  through  a  brief  explanation  of  the  ele- 
ments that  have  been  enumerated  above. 

1.  The  covenant  creating  the  bondholder's  claim  on  the 
income  and  assets  of  the  corporation  is  a  legal  instrument 
called  the  indenture.  Broadly  speaking,  there  are  two 
classes  of  bond  indentures,  namely,  the  mortgage  deed  of 
trust  and  the  debenture,  each  of  which  gives  name  to  a 
class  of  bonds. 

If  the  covenant  is  in  the  nature  of  a  mortgage  it  con- 
veys title  to  the  property  supporting  the  bond  issue  to  a 
trustee,  to  be  held  by  him  in  trust  for  the  benefit  of  the 
bondholders  who  become  the  beneficiaries.  The  stock- 
holders, however,  retain  their  power  of  control  over  the 
corporation,  which  remains  in  full  possession  and  enjoy- 
ment of  the  property  as  long  as  the  claims  of  the  bond- 
holders are  faithfully  and  regularly  satisfied.  In  addition 
to  containing  sections  on  these  points,  the  covenant  also 
contains  an  introduction  giving  the  names  of  the  parties 
and  the  legal  status  of  the  corporation,  together  with  a  re- 
cital of  its  authority  to  incur  bonded  indebtedness,  and 
also  sections  describing  the  bond  certificate,  rate  of  interest, 
date  of  redemption,  and  in  the  fullest  detail,  the  property 
that  is  pledged  in  support  of  the  mortgage,  requirements 
as  to  insurance  of  this  property,  a  statement  of  the  securi- 
ties of  subsidiaries,  if  there  are  any,  and  a  section  dealing 
with  foreclosure  and  control  in  case  of  default.  Some  of 
these  mortgage  trust  deeds  attain  considerable  length,  es- 
pecially in  the  case  of  railroad  corporations,  some  of  whose 
indentures  would  make  a  fair  sized  book  if  printed  and 
bound. 

The  debenture,  unlike  the  mortgage  bond,  does  not  con- 
vey in  trust  any  specific  property  of  the  corporation,  but  is 
very  much  like  an  unsecured  promissory  note.    The  holders 


138     SECURITIES-ISSUING    ORGANIZATIONS 

of  debenture  bonds,  thus,  in  so  far  as  their  claim  on  the 
assets  of  the  corporation  in  case  of  insolvency  is  concerned, 
are  on  the  same  level  as  general  creditors.  They  have  been 
little  used  in  this  country,  but  constitute  the  chief  type  of 
creditor  securities  issued  by  the  English  railway  companies. 

2.  The  nature  of  the  supporting  value  back  of  the  prin- 
cipal of  the  loan  is,  in  final  analysis,  the  determinant  of  the 
real  value  of  the  bond.  In  the  case  of  the  mortgage  bond 
the  supporting  value  is  the  real  and  personal  property 
specifically  described  in  the  deed  of  trust.  When  it  in- 
cludes all  of  the  property  of  the  corporation  the  bond  is 
called  a  general  mortgage  bond,  and  when  but  a  part  of  it, 
as  for  example  a  single  division  of  a  railroad  or  a  freight 
or  passenger  terminal,  it  is  a  special  mortgage  bond.  The 
amount  of  property  pledged  is  also  important;  if  it  is  fixed, 
it  limits  the  amount  of  bonds  that  may  be  issued,  and  if 
it  is  permitted  to  bring  additional  property  under  the 
mortgage,  the  bond  issue  may  be  extended.  Out  of  this 
feature,  coupled  with  variations  in  the  method  of  issue, 
spring  three  types  of  mortgages;  (1)  the  closed,  under 
which  the  amount  of  bonds  is  fixed  and  all  must  be  issued 
at  one  and  the  same  time;  (2)  the  open-end,  authorizing  an 
indefinite  amount  of  bonds  to  be  issued  as  needed  under 
certain  restrictions,  and  (3)  the  limited  open-end,  authoriz- 
ing a  maximum  amount  of  bonds  but  permitting  them  to 
be  issued  as  needed.  The  first  and  third  are  quite  common 
with  railroads  and  industrials,  while  the  second  type  has 
been  used  at  times  —  but  infrequently  —  by  railroads. 

When  the  supporting  value  consists  solely  of  the  securi- 
ties of  other  corporations  the  bonds  are  called  collateral 
trust  bonds;  when  of  equipment,  such  as  the  rolling  stock 
of  railroads,  equipment  trust  bonds;  and  if  they  are  issued 
to  secure  money  to  purchase  property,  and  are  to  be  se- 
cured by  the  property  to  be  bought,  they  are  purchase- 
money  bonds.     Sometimes,  however,  the  supporting  value 


THE    CORPORATION  —  SECURITIES,    ETC.  139 

is  not  specifically  designated,  as  in  the  debenture,  in  which 
case  no  preferred  claim  on  the  property  of  the  corporation 
vests  in  the  bondholder.  Several  issues  of  bonds  may  be 
supported  by  the  same  property  in  which  case  they  are 
designated  as  "  first "  or  "  second  "  mortgage  bonds. 

3.  The  manner  in  which  payment  of  the  interest  and 
principal  is  to  be  made  is  also  a  factor  determining  the 
character  of  the  bond.  Upon  it  depends  the  procedure 
that  the  corporation  is  obliged  to  follow  in  meeting  its 
bonded  debts. 

The  rate  of  return,  or  earning  power  of  the  bonds,  is  the 
rate  of  interest  that  it  bears.  This  is  usually  expressed  as 
a  fixed  per  cent  of  the  amount  of  the  prinicpal.  Due  to 
the  relatively  lighter  risk  of  loss  assumed  by  the  bond- 
holder, this  rate  is  ordinarily  less  than  the  prescribed  divi- 
dend rate  of  preferred  stock.  While  the  latter  is  commonly 
set  at  seven  or  eight  per  cent  of  the  par  value,  the  former 
is  most  frequently  five  or  six  per  cent  per  annum.  It  consti- 
tutes a  fixed  charge  against  the  income  of  the  corporation, 
and  except  in  the  case  of  income  bonds,  it  may  not  b6 
carried  over  from  year  to  year  but  must  be  paid  when  it 
falls  due.  The  rate  is  usually  an  annual  rate,  but  payment 
is  in  semi-annual  or  by  other  time  installments.  Bonds 
may  be  made  participating  by  providing  that  any  income, 
more  than  sufficient  to  pay  the  interest  on  the  bond  and  a 
like  dividend  on  stock,  shall  be  distributed  on  an  equal 
percentage  basis  to  the  two  classes  of  security  holders. 

The  principal  is  the  sum  total  of  the  outstanding  bonds, 
each  bond  being  a  fractional  part  of  this  amount  expressed 
in  terms  of  money.  The  principal  represented  by  a  single 
bond  is  more  frequently  $1,000  than  any  other  sum.  Two 
methods  of  payment  are  in  use,  the  sinking  jimd  and  the 
serial.  Under  the  former  the  entire  issue  of  bonds  must 
be  redeemed  at  the  expiration  of  the  fixed  term  of  years 
for  which  the  loan  runs,  but  frequently  the  issue  may  be  re- 


140     SECURITIES-ISSUING    ORGANIZATIONS 

deemed  in  part  at  a  premium  at  the  option  of  the 
directors  of  the  corporation  upon  due  notice  to  the  bond- 
holder. Under  the  serial  plan  the  maximum  time  limit  of 
the  loan  is  fixed  and  regulaT  redemption  dates  fixed  so  that 
the  entire  issue  will  be  redeemed  in  equal  installments,  the 
last  on  the  expiration  date.  Thus,  we  may  have  serial 
bonds  issued  for  a  ten-year  period,  one-tenth  to  be  re- 
deemed at  the  expiration  of  each  year.  The  bonds  that  are 
to  be  paid  are  chosen  by  lot.  Bonds  are  profit-sharing 
when  the  bondholder  is  entitled  to  a  share  of  the  increase 
in  value  of  the  pledged  property  accruing  during  the  life 
period  of  the  bond. 

The  interest  and  principal  may  be  made  payable  in 
gold  in  which  case  the  bond  is  called  a  gold  bond. 

4.  The  power  of  foreclosure  and  the  assumption  of  control 
may  become  exercisable  by  the  bondholder  under  several 
conditions,  the  most  important  being  the  failure  of 
the  corporation  to  pay  the  interest  on  the  bonds  as 
due,  and  its  failure  to  pay  the  principal  at  the  ex- 
piration of  the  loan.  Under  most  mortgage  bond  in- 
dentures, foreclosure  may  be  had  upon  the  advent 
of  either  of  the  two  contingencies,  and  the  same  thing 
applies  generally  to  debenture  bonds.  In  the  case 
of  income  bonds,  however,  the  lapse  of  an  interest  pay- 
ment does  not  give  the  bondholder  the  right  to  exercise 
this  power  but  he  may  do  so  only  on  failure  to  pay  the 
principal.  This  is  so  because  the  only  support  back 
of  the  interest  of  the  income  bond  is  the  annual  income 
of  the  corporation,  while  in  the  mortgage  bond  it  is  the 
mortgaged  property  which  in  both  cases  also  supports  the 
principal. 

In  most  bond  indentures  is  inserted  a  provision  granting 
the  corporation  a  period  of  grace  in  which  to  make  pay- 
ment of  interest  and  principal  before  the  bond  holders  take 
over  the  control.    This  period  is  most  frequently  the  same 


THE    CORPORATION—  SECURITIES   ETC.      141 

as  the  regular  dividend  interval,  that  is  to  say,  six  months.^ 
When  the  bondholders  take  over  the  control  the  stock- 
holders usually  step  out  and  appoint  a  committee  to  look 
after  their  interests.  It  is  customary  for  the  bondholders 
to  buy  the  property  of  the  corporation  when  this  is  sold  at 
auction  to  meet  the  debts.  Another  course  of  procedure 
is  to  reorganize  the  corporation  by  means  of  readjusting 
its  capital  in  such  a  way  as  to  reduce  the  amount  of  out- 
standing securities.  This  results  in  either  dropping  the 
common  stockholders  or  in  materially  reducing  their 
holdings. 

5.  The  purpose  for  which  the  bond  is  issued  frequently 
gives  name  to  the  issue.  Thus,  we  find  "  refunding," 
"  construction,"  "  unifying,"  "  extension,"  "  improvement," 
"  consolidated  "  bonds,  etc. 

Short  Time  Notes.  —  It  sometimes  happens  that  the 
corporation  may  be  temporarily  in  need  of  funds;  or  that, 
while  a  bond  issue  is  necessary,  the  money  market  is  not 
favorable  for  its  sale.  In  such  cases  corporations  fre- 
quently resort  to  the  issuance  of  short  time  notes  which  have 
all  the  characteristics  of  the  money  paper  or  notes  issued 
by  proprietors  of  personally  owned  businesses.  These  short 
time  notes,  while  they  are  not,  strictly  speaking,  securities, 
differ  only  in  the  length  of  time  that  they  run  —  usually 
from  six  months  to  three  years  —  from  debentures.  Conse- 
quently they  are  now  often  included  under  that  term.  Un- 
usually large  quantities  of  such  notes  were  issued  from  1918 
to  1920,  due  to  stringent  money  conditions  that  made  bond 
issues  too  costly.'^ 

6  In  Part  VI,  in  Forms  27  and  28,  are  given  brief  descriptions 
of  some  representative  types  of  bonds  which  the  student  should 
study  carefully. 

"  See  table  on  page  91  showing  new  securities  issued  in  the 
United  States. 


142     SECURITIES-ISSUING    ORGANIZATIONS 

Use  of  Securities 

Classes  of  Securities  Ordinarily  Used.  —  It  has  thus  far 
become  apparent  that  a  vast  variety  of  securities  may  be 
created  through  the  use  of  minute  differentiations  in  the 
characteristics  of  the  several  major  cLisses.  This  possi- 
bility naturally  makes  the  corporation  an  extremely  flexi- 
ble form  of  ownership  organization.  However,  American 
corporations  seldom  employ  more  than  two  or  three  classes 
of  stock.  This  is  not  so  generally  true  of  bonds,  particu- 
larly with  our  railroads,  where  successive  hypothecation  of 
the  property  in  whole  or  in  part  is  the  general  rule,  and 
where  it  is  also  common  practice  to  retire  one  bond  issue 
out  of  the  proceeds  of  another.  A  few  examples  will  serve 
to  illustrate  these  points. 

The  consolidated  balance  sheet  (1919)  of  the  United 
States  Steel  Corporation,  which  owns  a  great  many  sub- 
sidiary corporations,  shows  that  the  Steel  Corporation  itself 
had  outstanding  on  December  31,  1919, 

Common  Stock    $508,302,500 

Preferred  Stock   (7%   Cumulative) 360,281,100 

U.  S.  Steel  50  yr.  5%  Bonds  230,709,000 

V.  S.  Steel  10-60  yr.  5%  Bonds 176,393,000 

Bonds    of    Subsidiaries    guaranteed    by 

U.  S.  Steele  (12  issues)   99,227,000 

But  in  addition  to  the  above,  the  subsidiaries  themselves 
had  outstanding  $431,342.50  in  several  classes  of  stock  and 
$62,398,931.53  in  bonds  comprising  some  33  individual 
issues. 

The  Southern  Pacific  Railroad  had  outstanding  on 
December  31,  1919, 

1.  Common  Stock   $160,000,000 

2.  S.  P.  R.  R.  Co.  First  Refund  Gold  4's.*...     143,831,500 

3.  S.  P.  Branch  Ry.  First  Gold  4's 3,533,000 


THE    CORPORATION  —  SECURITIES,    ETC.    143 

4.  S.  P.  R.  R.  (of  Cal.)  First  Consol.  Gold  5's        4,127,500 

5.  Northern  Railway  First  Gold  5's   4,751,000 

6.  Northern  California  Ry.  First  Gold  5's. . . .         1,074,000 

7.  Coast  Line  Ry.  First  6's  700,000 

(The  star  indicates  that  these  bonds  were  issued  largely  to 

supplant  outstanding  prior  issues.) 

The  practice  of  using  a  multiple  classification  of  stock 
is  perhaps  more  common  in  England  than  in  any  other 
country  of  the  world.  For  example,  Lever  Brothers,  Ltd., 
incorporated  in  Great  Britain  in  1894,  is  authorized  to 
issue  the  following  classes  of  stock: 

1.  £  4,000,000—   57o  Cumulative  First  Preference 

2.  £  6,000,000  —   6%  Cumulative  "  A  "  Preference 

3.  £10,000,000—  *  "  B "  Preference 

4.  £10,000,000  —  *  "C"  Preference 

5.  £10,000,000—15%  Cumulative  Preferred  Ordinary 

6.  £10,000,000—15%  Cumulative  "A"  Preferred    Ordinary 

7.  £10,000,000  —  20%  Cumulative  Preferred  Ordinary 

8.  £10,000,000  —  20%  Cumulative  "  A  "  Preferred    Ordinary 

9.  £10,000,000  —  20%  Cumulative  "  B  "  Preferred    Ordinary 

10.  £10,000,000—   5%  Cumulative  Preferred  Ordinary 

11.  £10,000,000  —  Ordinary. 

(The  stars  indicate  that  the  per  cent  of  cUvidend  is  left  for 
determination  at  time  of  issue.) 

While  these  are  representative  examples  of  very  large 
corporations,  they  are  nevertheless  typical  illustrations  of 
the  use  of  various  classes  of  securities.  But  hundreds 
of  examples  of  smaller  corporations  might  be  cited  where 
but  a  single  class  of  stock  and  no  bonds  are  used. 

Capitalization.  —  The  term  "  capitalization  "  as  cur- 
rently used  with  reference  to  corporations,  presents  a 
variety  of  meanings.  Some  writers  on  corporation  finance 
define  it  as  the  face  or  par  value  of  the  stocks  and  bonds 
of  the  corporation.     This  definition,  however,  neglects  to 


lU      SECURITIES-ISSUING    ORGANIZATIONS 

take  into  account  that  stock  may  be  issued  without  par 
value,  and  also  that  not  all  of  the  securities  authorized 
may  actually  have  been  issued  and  placed  in  the  hands  of 
persons  who  will  give  effect  to  their  claim  on  income  and 
assets.  A  better  definition  of  capitalization  is  the  total 
amount,  at  par  value,  of  the  securities  issued  by  the  corpora- 
tion plus  the  sum  actually  received  by  it  for  non-par  value 
shares  outstanding.  This  may  be  more  briefly  stated  as 
"  the  obligation  assumed  by  the  corporation  that  arises 
from  issued  securities." 

A  few  examples  will  serve  to  make  this  definition  clear. 

Case  I.  Where  the  corporation  receives  the  full  par  value  of  the 
securities  issued.^ 

Securities  Issued  Value  Received 

5,000  shares  common  stock  $500,000 

2,500  shares  preferred  stock 250,000 

250  Bonds  @  $1,000  each  250,000 

$1,000,000 

In  this  case  the  capitalization  equals  the  value  received  by  the 
corporation  in  payment  for  its  securities. 

Case  II.  Where  the  corporation  receives  less  than  the  full  par 
value  for  securities  issued. 

Securities  Issued  Value  Received 

2,500  shares  common  stock    )  «:c:nnnnn 

5,000  shares  preferred  stock  I ' 

250  Bonds  @  $1,000  each   250,000 

$750,000 

Here  the  common  practice  of  giving  away  common  stock 
with  each  share  of  preferred  issued,  has  been  followed. 
For  two  shares  of  preferred  issued,  a  bonus  of  one  share 

8  Unless  otherwise  stated  the  par  value  of  stocks  is  assumed  to 
be  $100  per  share. 


THE    CORPORATION  —  SECURITIES,    ETC.  145 

of  common  stock  has  been  given  the  subscriber.  As  a 
result,  a  total  of  $750,000  in  stock,  at  par,  has  been  issued 
for  $500,000,  while  the  bonds  have  been  sold  at  par.  The 
capitalization  of  the  corporation  is,  in  this  case,  $1,000,000 
while  the  value  received  by  it  is  but  $750,000.  Under  these 
conditions  the  stock  is  said  to  be  "  watered."  If  the  pre- 
ferred stock  has  preference  as  to  assets  as  well  as  dividends 
the  equity  of  the  common  stockholders  in  the  property  of 
the  corporation  is  practically  nothing  and  the  value  of 
the  stock  will  be  determined  largely  by  its  power  to  control 
the  business  policies. 

Case  III.  Where  stock  without  par  value  is  employed. 

Securities  Issued  Value  Received 

2,500  shares  without  par  value   $100,000 

5,000  shares  preferred  stock  500,000 

250   Bonds    @    $1,000   each    250,000 

$850,000 

The  capitalization  in  this  case  would  be  $850,000,  a  sum 
exceeding  the  par  value  of  the  securities  issued  by  $100,000 
which  is  the  amount  actually  received  for  non-par  value 
stock.  If  the  non-par  value  common  stock  has  been  given 
away,  the  capitalization  would  be  reduced  by  $100,000, 
but  it  would  still  be  an  obligation  assumed  by  the  corpora- 
tion, although  it  would  have  practically  no  equity  in  the 
property. 

Securities  can,  of  course,  also  be  issued  for  more  than 
their  par  value  in  which  case  the  difference  between  the 
capitalization  and  the  assets  constitutes  surplus. 

The  capitalization  must  appear  on  the  balance  sheet  of 
the  corporation  on  the  liabilities  side,  balanced  by  assets. 
When  non-par  value  stock  only  is  issued,  the  offset  for  the 
stock  liability  is  the  sum  or  value  received  for  it.  The 
same  is  true  in  case  full  value  is  received  for  par  value 
securities.     But  if  par  value  securities  have  been  issued 


146     SECURITIES-ISSUING    ORGANIZATIONS 

for  less  than  their  par,  this  value  must  be  inflated  to  make 
assets  equal  the  liabilities.  This  inflation  is  taken  care  of 
in  several  ways.  A  much  greater  value  than  their  real 
worth  may  be  ascribed  to  the  business  plant  and  equip- 
ment, or  items  such  as  "  patents,"  "  rights,"  "  franchises  " 
or  "  good-will  "  may  be  inserted  among  the  assets.  The 
latter  is  the  better  accounting  practice,  because  it  indi- 
cates at  a  glance  that  the  corporation  has  not  received  in 
tangible  assets  a  value  equal  to  the  securities  that  it  has 
issued.  Such  a  condition  does  not  necessarily  indicate 
over-capitalization,  for  it  may  be  that  the  intangible  assets 
of  patents,  good-will,  etc.,  are  more  than  sufficient  to  make 
up  the  difl"erence.  This  is  w^U  illustrated  by  the  value 
of  such  patents  as  the  telephone  and  such  trade  marks 
as  "  Uneeda  "  and  "  Wrigley's."  Still  a  third  method  of 
handling  an  apparent  excess  capitalization  of  this  charac- 
ter is  to  enter  an  item  such  as  "  discount  on  stock  "  or  "  dis- 
count on  bonds "  among  the  assets,  but  this  is  infre- 
quently encountered  in  practice. 

The  following  condensed  balance  sheet  of  the  American 
Milling  Company  illustrates  remarkably  well  the  inflation 
of  assets  to  offset  capitalization.  In  1912  patents,  good- 
will, etc.,  were  entered  as  worth  $2,437,521  while  in  1914 
no  value  whatever  is  ascribed  to  them.  It  had  originally 
been  inserted  to  inflate  the  assets.  The  reason  for  dropping 
the  item  from  the  balance  sheet  may  be  found  by  a  com- 
parison of  the  capital  stock  items  under  liabilities  for  the 
two  years.  The  outstanding  capital  stock  has  been  re- 
duced by  $2,795,576. 


THE    CORPORATION  —  SECURITIES,    ETC.  147 

American  Milling  Company 

Assets                                                        1914  1912 

Heal   Estate,   Buildings,   Machinery,   etc.  $   964,057  $1,013,039 

Investments     465  1,340 

Patents,  good-will,  etc —  2,437,521 

Deferred  charges  to  expense  5,818  11,696 

Profit  and  loss  deficit  —  194,441 

Linseed  business  —  242,146 

Current   assets    110,977  266,845 

Total  assets  $1,081,317  $4,167,028 

Liabilities 

Capital  stock $   698,894  $3,494,470 

Bonded  debt   139,000  128,000 

Profit  and  loss  surplus  108,260                

Reserves    3,418  9,172 

Current  liabiUties  131,745  535,386 

Total  habilities  $1,081,317  $4,167,028 

The  total  capitalization  of  the  American  railways  for 
which  complete  statistics  are  available,  will  throw  some 
additional  light  upon  the  general  use  of  the  several  classes 
of  securities  common  to  this  country.  The  following  table 
shows  the  capitalization  of  all  operating  railways  and  their 
non-operating  subsidiaries,  but  excludes  switching  and 
terminal  companies. 

Capitalization  of  Railways  in  the  United  States  on 
December  31,  1918 

{Thirty-second  Annual  Report  on  the  Statistics  of  Railways 
in  the  United  States) 

Actually  Held  by  or 

Ownership  Securities   out-standing  for  company  Totals 

Common  Stock   ...  $7,052,291,302  $197,015,979  $7,249,307,281 

Preferred   Stock...     1,794,425,212  11,384,543  1,805,809,755 

Total  Stock  ....  $8,846,716,514  $208^00,522  $9,055,117,036 


148     SECURITIES-ISSUING    ORGANIZATIONS 

Creditor  Securities 

Mortgage   bonds.  $8,108,695,075  $1,007,224,563  $9,115,919,638 

Collateral       trust 

bonds     849,716,189  27,187,120  876,903,309 

Income   bonds    ..        333,986,190  19,117,720  353,103,910 

Miscellaneous     ..        993,242,271  18,885,850.     1,012,128,121 

Equipment  Bonds       320,916,764  50,744,063  371,660,827 

Total  Bonds   .  $10,606,556,489  $1,123,159,316  $11,729,715,805 

Total  Capital- 
ization      $19,453,273,003    $1,331,559,838  $20,784,832,841 

The  extravagant  use  of  creditor  securities  is  characteristic 
of  our  railways.  In  this  respect  they  differ  considerably 
from  most  industrial  concerns  who  follow  a  more  conserva- 
tive policy  with  regard  to  funded  debt. 

Over-Capitalization.  —  Over-capitalization  of  a  corpora- 
tion is  that  state  in  which  the  earnings  of  the  corporation 
are  for  a  period  of  years,  more  or  less,  consistently  inade- 
quate to  meet  the  current  claims  of  its  security  holders  on 
its  income.  These  claims  are  charges  against  the  earnings 
of  the  corporation.  In  the  case  of  bonds  they  are  usually 
fixed  and  not  deferrable;  for  preferred  stock  fixed  but 
deferrable,  and  for  common  stock  contingent  upon  earn- 
ings. The  income  of  the  corporation  in  turn  is  dependent 
not  only  upon  the  earning  power  of  the  tangible  and  in- 
tangible assets  that  it  employs  in  its  business,  but  also  upon 
the  efficiency  of  its  managers  and  the  financial  policies  of 
the  entrepreneurs.  To  insufficient  assets  coupled  with  too 
much  optimism  regarding  future  earning  power,  may 
be  attributed  most  cases  of  over-capitalization  that  have 
been  so  conspicuous  in  the  corporation  annals  of  this 
country. 

In  the   following  table   are   shown   some   of  the   more 

prominent  examples  of  over-capitalization.^ 

9  The  data  relating  to  the  United  States  Steel  Corporation  is 
taken  from  Ripley,  TruMs,  Pools  and  Corporations  and,  for  the  other 
four  coi-porations,  from  Dewing,  Corporate  Promotions  and  Re- 
organizations. 


THE    CORPORATION  —  SECURITIES,    ETC.    149 


Kinds  of  securi- 
ties making  up 
the  capitaliza- 
tion 


Bonds 

Preferred  stock, . 

1st 

Preferred  stock, . 

2d 

Common  stock .  . 
Capitalization. . . 
Estimated  assets 


National 

Starch 

Co. 


S3,837,000 

2,219,400 

1,846,800 
4,450,700 
12,353,900 
-3,750,000 


Glucose 

Sugar 

Ref.  Co. 


$13,639,300 


24,027,300 

37,660,600 

3,750,000 


United 
States 
Realty  and 
Construc- 
tion Co. 


$27,500,000 


33,500,000 
61,000,000 
22,000,000 


United 

States 

Shipbldg. 

Co. 


$24,500,000 
20,000,000 


25,000,000 
69,500,000 
16,000,000 


United  States 
Steel  Corp. 


$384,413,680 
510,205,743 


508,227,394 

1,402,846,817 

793,000,000 


If  the  earnings  are  sufficient  to  pay  the  claims  of  all 
security  holders  except  the  common  stockholders,  it  would 
not  be  a  bad  case  of  over-capitalization;  and  the  common 
stock  would  have  a  value  based  on  possible  dividends. 
But  if  the  earnings  suffice  to  pay  only  interest  on  the  bonds 
and  part  of  the  preferred  stock  dividend,  allowing  the  un- 
paid portion  to  accumulate,  the  case  is  much  more  serious. 
This  will  eventually  necessitate  a  reorganization  of  the 
corporation  in  such  a  way  as  to  reduce  the  amount  of  out- 
standing securities.  When  the  corporation  cannot  pay  the 
interest  or  principal  on  its  bonds  when  due  the  result 
is  insolvency  and  receivership  necessitating  a  forced  re- 
organization or  a  complete  winding  up  of  the  business. 
In  all  of  the  examples  given  above  with  the  exception  of 
the  United  States  Steel  Corporation,  over-capitalization 
resulted  eventually  in  voluntary  or  forced  reorganization. 
The  United  States  Steel  Corporation  adopted  the  policy  of 
putting  its  earnings  back  into  plant  and  equipment  and  in 
this  way  built  up  its  assets  until  they  today  exceed  in 
value  the  sum  of  its  outstanding  securities. 

A  further  study  of  the  corporate  securities,  their  uses, 
advantages  and  disadvantages,  as  well  as  their  relation 
to  capitalization  and  the  financial  policies  of  corporations, 
cannot  be  undertaken  in  this  work.  These  aspects  of 
corporate  organization  are  specifically  treated  in  standard 
works  on  corporation  finance. 


CHAPTER  IX 

THE   CORPORATION  — FORMATION,   CHARTER 
AND  BY-LAWS 

The  lack  of  uniformity  in  the  corporation  laws  of  the 
several  states  of  this  country,  together  with  the  annoying 
frequency  with  which  these  laws  are  modified,  or  repealed 
and  redrafted  by  the  state  legislature,  makes  it  next  to 
impossible  to  lay  down  any  general  rules  of  procedure  that 
must  be  followed  in  forming  a  corporation.  There  are  al- 
most as  many  variations  as  there  are  states,  and  each  year 
sees  new  requirements  introduced  and  old  discarded  ones 
resurrected.  If  the  student  is  especially  interested  in  the 
prescribed  procedure  of  any  particular  state,  he  must  con- 
sult its  latest  revised  statutes.  The  only  practical  presenta- 
tion of  this  subject  for  the  student  of  general  business 
organization  must  be  in  the  nature  of  a  general  composite  of 
the  legal  requirements  as  found  in  statutes  of  the  states, 
supplemented  here  and  there  with  notations  calling  atten- 
tion to  more  or  less  marked  deviations  from  these  general 
principles. 

General  and  Special  Corporation  Laws.  —  In  the  pre- 
ceding chapter  it  was  pointed  out  that  the  early  corpora- 
tions were  created  by  special  act  of  the  state  legislature. 
This  method  of  formation  was  finally  abandoned  when  the 
state  of  Rhode  Island,  in  1892,  amended  its  constitution, 
providing  for  incorporation  under  general  corporation 
laws.  Today  such  general  corporation  laws  have  been 
adopted  by  every  state.  Some  of  these  laws  lay  down 
uniform,  general  rules  governing  the  formation  of  all  types 
of  corporations,  with  the  exception  of  municipal  corpora- 

150 


THE    CORPORATION  —  FORMATION,    ETC.  151 

tions;  others  apply  to  business  corporations  generally, 
while  still  others  to  only  certain  types  of  business  corpora- 
tions. The  present-day  tendency  is  to  confine  the  appli- 
cability of  general  corporation  laws  to  all  business  corpora- 
tions that  are  not  engaged  in  rendering  a  public  service, 
banking,  insurance  and  the  like.  This  narrowing  of  the 
scope  of  such  general  laws  appears  to  follow  a  line  whose 
determination  rests  upon  the  existence  in  the  enterprise  of 
a  special  public  interest  that  can  be  adequately  safeguarded 
only  by  closer  regulation  and  control  afforded  by  special 
laws.  Thus,  we  find  in  most  states  public  service  commis- 
sions, state  bank  and  insurance  commissioners,  etc.,  who 
are  vested  with  special  regulatory  power,  as  well  as  with 
the  duty  of  supervising  the  formation  and  operation  of 
corporations  engaged  in  special  fields  of  enterprise.^ 

This  scheme  of  general  and  special  corporation  law^s  is 
well  illustrated  by  the  "Business  Corporation  Law"  adopted 
by  the  state  of  New  Hampshire,  in  1919.  Under  this  law 
may  be  formed  any  corporation  for  the  purpose  of  carry- 
ing on  any  lawful  business  except  banking,  the  construction 
and  maintenance  of  railroads,  insurance,  the  business  of 
making  contracts  for  the  payment  of  money  at  a  fixed 
date  or  upon  the  happening  upon  some  contingency,  or  the 
business  of  a  trust  company,  surety  or  indemnity  company, 
a  safe  deposit  company,  or  a  trading  stamp  company,  or 
the  business  of  issuing,  selling  or  redeeming  trading  stamps, 
coupons,  tickets  or  other  similar  devices. 

Formation  of  Business  Corporations 

The  work  of  forming  a  business  corporation  begins  with 

the  decision  on  the  part  of  the  persons  interested  to  form 

1  In  New  York,  Alabama,  and  several  other  states  the  term 
"  corporation  "  is  construed  to  include  all  joint  stock  companies,  and 
associations  having  any  of  the  powers  or  privileges  of  corporations 
not  possessed  by  individuals  or  partners.  This  would  include  legal 
entity,  limited  liability  and  the  power  to  issue  securities. 


152     SECURITIES-ISSUING    ORGANIZATIONS 

a  corporation  to  operate  a  business  undertaking,  and  ends 
when  the  corporation  is  in  a  position  to  begin  business. 
It,  therefore,  includes  such  items  as  (1)  who  may  in- 
corporate, (2)  pre-incorporation  agreement,  (3)  applica- 
tion for  charter,  (4)  certification  and  recording  of  articles 
of  incorporation  and  (5)  the  organization  meetings  of 
stockholders  and  directors.  The  more  common  method 
of  procedure  is  that  here  outlined,  but  in  a  few  states, 
among  them  Maine,  Massachusetts,  Missouri  and  New 
Hampshire,  the  order  is  practically  reversed. 

Who  May  Incorporate.  —  The  business  corporation 
must,  as  a  general  rule,  be  formed  by  natural  persons  of 
lawful  age  and  legally  competent.  The  qualifications  of 
incorporators,  other  than  this,  vary  greatly  from  state  to 
state.  Requirements  such  as  the  following  are  common: 
that  at  least  two-thirds  of  the  incorporators  shall  be  citi- 
zens of  the  United  States,  and  that  at  least  one  must  be  a 
resident  of  the  state  of  incorporation.  This  is  the  New 
York  provision.  The  number  of  incorporators  is  also 
limited  by  law,  usually  to  a  minimum  of  three,  but  the 
maximum  number  varies  greatly.  In  practice,  chiefly  as 
a  matter  of  convenience,  the  minimum  number  of  incor- 
porators is  most  frequently  used. 

Pre-Incorporation  Agreement.  —  Naturally,  those  who 
desire  to  form  a  corporation  must  agree  among  themselves 
to  incorporate  for  a  particular  purpose.  Such  an  agreement 
is  in  the  nature  of  a  partnership  agreement  and  incorpora- 
tors are  treated  as  partners  until  the  process  of  formation  is 
complete. 

Application  for  a  Charter.  —  The  incorporators  then 
meet  to  draw  up  the  charter  application.  This  should  con- 
form >  in  every  respect  to  the  reciuirements  of  the  state  laws. 
A  complete  application  must  include  (1)  a  draft  of  the 
powers,  and  privileges  that  the  incorporators  desire  to  have 
granted  by  the  state  to  the  proposed  corporation,  (2)  the 


THE    CX)RPORATION  —  FORMATION,    ETC.      153 

tender  in  payment  of  all  organization  taxes  and  fees, 
and  (3)  such  other  documents  as  may  be  required  under 
the  laws  of  the  state. 

The  draft  of  powers,  privileges,  etc.,  should  be  very 
carefully  prepared,  as  this,  when  granted,  becomes  the 
charter,  or  articles  of  incorporation.  Requirements  as  to 
the  contents  of  this  document  are  in  most  states  very  ex- 
plicit. It  must  commonly  set  forth:  the  name  of  the 
corporation;  the  purpose  for  which  it  is  formed;  the  place 
where  its  principal  business  is  to  be  transacted;  the  term 
for  which  it  is  to  exist ;  the  number  of  directors ;  the  amount 
of  capital  stock  and  the  number  of  shares  into  which  it  is 
divided;  the  amount  of  capital  stock  actually  subscribed 
and  by  whom,  and  such  special  provisions,  consistent  with 
the  laws  of  the  state,  as  the  incorjjorators  may  desire  to 
include. 

The  other  documents  frequently  required  are  such  as 
relate  to  the  consideration  that  the  prospective  corporation 
is  to  receive  from  the  original  subscribers  in  payment  for  its 
stock.  Thus,  where  real  estate  has  been  pledged  as  con- 
sideration for  stock,  it  must  be  clearly  identified  by  metes 
and  bounds  and  the  value  at  which  it  is  accepted  by  the 
corporation  stated. 

Where  there  is  a  requirement  that  a  certain  per  cent  of 
the  capital  stock  must  be  subscribed  to  and  actually  paid 
in,  a  trustee,  to  whom  such  payments  are  made,  is  appointed 
to  serve  until  the  corporation  has  been  fully  organized. 
He  then  turns  over  the  consideration  he  has  received  to  it. 
In  Kansas,  twenty  per  cent  of  the  capital  stock  must  be 
subscribed  to  and  paid  in ;  in  Missouri,  fifty  per  cent.  The 
same  provision  is  also  found  in  other  states. 

All  documents  are  then  taken  before  some  state  or  county 
officer  where  they  are  subscribed  to  by  the  incorporators 
and  acknowledged  and  signed.  Such  officers  must  fre- 
ciuently  qualify  as  authorized  to  take  and  certify  ac- 
knowledgments of  real  property,  such  as  deeds. 


154     SECURITIES-ISSUING    ORGANIZATIONS 

The  application,  having  been  properly  prepared  and 
acknowledged,  is  then  filed  with  the  clerk,  or  recorder,  of 
the  county  in  which  the  corporation  was  formed,  or  with 
the  Secretary  of  State  of  the  state  of  incorporation,  and  in 
some  states  with  the  Attorney-General. 

The  organization  taxes  and  fees  that  must  be  paid  are 
the  following: 

(1)  A  charter  tax  —  usually  based  on  the  amount  of 
capital  stock  authorized. 

(2)  Fees  to  the  Secretary  of  State  for  filing  and  recording. 

(3)  Fees  to  the  county  clerk  or  recorder  of  deeds,  for 
filing  and  recording. 

The  fees  are  uniformly  small,  but  the  charter  taxes  show 
great  variations  from  insignificant  sums  to  amounts  that 
are  very  large,  as  the  following  table  will  show. 

Corporation  Franchise  Taxes  op  Selected  States,  1919 


state  of 


On  authorized  capital  stock  of 


Alabama 

Colorado 

Idaho 

Kansas 

Missouri 

New  Jersey.  .  . . 
New  Hampshire 

New  York 

Oregon 

West  Virginia.  . 


$250,000 

$1,000,000 

$10,000,00 

.1250 

$1,000 

$10,000 

60 

210 

2,010 

GO 

100 

150 

175 

550 

5,050 

150 

525 

5,025 

50 

200 

2,000 

100 

250 

1,150 

250 

1,000 

10,000 

45 

75 

750 

190 

340 

475 

Certification  and  Recording  of  the  Charter.  —  The  state 
or  county  officer  to  whom  the  documents  are  submitted 
causes  them  to  be  carefully  examined  to  assure  himself 
that  they  conform  in  every  respect  to  the  requirements  of 


THE    CORPORATION  —  FORMATION,    ETC.     155 

law.  The  charter  is  then  certified  and  preserved  in  the 
files  or  books  of  the  office.  Three  certified  copies  are  com- 
monly made  and  distributed  as  follows:  one  to  the  incor- 
porators for  the  corporation,  one  to  the  clerk  or  recorder 
of  the  county  in  which  the  main  office  of  the  corporation  is 
located  and  one  retained  by  the  Secretary  of  State.  Those 
copies  that  are  kept  on  file  in  the  offices  of  the  public  offi- 
cials are  open  to  inspection  by  the  public,  so  that  whoever 
deals  with  the  corporation  may  know  what  its  powers  and 
privileges  are. 

Organization  Meetings.  —  Notice  of  certification  of  the 
charter  having  been  received  by  the  incorporators,  these 
must  now  proceed  to  effect  a  functioning  organization. 
This  may  be  done  at  the  first  meeting  of  stockholders  and 
of  the  board  of  directors. 

The  first  meeting  of  stockholders  is  usually  assembled 
by  bringing  the  incorporators  together  by  means  of  a 
written  call  and  waiver  of  notice,  signed  by  all  of  the  in- 
corporators. The  call  should  indicate  the  purpose  and 
place  of  the  meeting.  The  meeting  is  then  called  to  order 
and  organized  by  the  election  or  appointment  of  a  chair- 
man and  a  secretary.  The  adoption  of  the  charter  and  the 
framing  and  adoption  of  by-laws  follow.  This  done,  the 
stockholders  proceed  to  elect  the  first  board  of  directors,  if 
these  are  not  already  named  in  the  charter.  In  a  number  of 
the  states,  as  in  New  York,  the  laws  require  that  the 
directors  for  the  first  year  must  be  named  in  the  charter, 
which  does  away  with  the  necessity  of  electing  them  at  the 
first  meeting  of  the  stockholders.  The  next  thing  in  order 
is  the  conclusion  of  the  exchange  of  the  corporate  stock  for 
property  tendered  the  corporation  for  it.  Such  transactions, 
which  amount  to  an  acceptance  of  subscriptions  to  stock, 
must  have  express  authorization  of  the  stockholders,  even  as 
to  price. 

The  first  meeting  of  the  board  of  directors  ordinarily 


156     SECURITIES-ISSUING    ORGANIZATIONS 

follows  the  first  meeting  of  stockholders.  At  this  meet- 
ing the  directors  first  read  the  by-laws  to  familiarize  them- 
selves with  their  contents,  particularly  as  to  rules  laid 
down  for  their  own  control  and  as  to  officers  to  be  elected, 
their  duties,  etc.  They  then  elect  the  officers  of  the  cor- 
poration; adopt,  or  make  provision  for  the  adoption  of  a 
stock  certificate ;  accept  the  subscriptions  to  stock  by  others 
than  the  original  incorporators;  formally  exchange  stock 
for  property  as  instructed  by  the  stockholders,  fix  the 
treasurer's  bond,  designate  a  bank  as  depositary  of  funds, 
and  attend  to  such  other  matters  as  may  be  brought  be- 
fore them. 

The  corporation  is  then  ready  to  undertake  business. 

Reversed  Procedure.  —  The  "  Business  Corporation 
Laws"  of  New  Hampshire  (1919)  furnish  an  excellent  ex- 
ample of  a  prescribed  procedure  that  is  practically  the 
reverse  of  the  more  frequently  encountered  form  described 
above.  The  following  brief  description  of  this  plan  is 
taken  from  the  Corporation  Journal."  "  Three  or  more 
persons  may  associate  together  to  form  a  corporation.  Any 
two  of  the  first  three  persons  signing  the  articles  of  agree- 
ment may  call  the  first  meeting  of  incorporators.  At  the 
organization  meeting  the  incorporators  effect  an  organiza- 
tion by  the  adoption  of  by-laws  and  by  the  election  of  a 
temporary  clerk,  a  treasurer,  a  board  of  not  less  than  three 
directors  and  such  other  officers  as  the  by-laws  may 
prescribe.  The  incorporators  determine  the  amount  of 
capital  stock  then  to  be  issued  and  the  consideration.  The 
treasurer  and  the  majority  of  the  directors  thereupon  sign 
and  make  oath  to  the  record  of  organization,  which  shall 
contain  a  true  copy  of  the  articles  of  agreement,  the  date 
of  the  organization  meeting,  the  names  and  addresses  of  the 
officers  and  directors  and  the  original  or  true  copies  of  all 
votes  passed  authorizing  the  issuance  of  stock.    The  record 

2  The   Corporation  Journal,  No.  89,  Vol.  Ill,  pp.  362,  363. 


THE    CORPORATION  —  FORMATION,    ETC.  157 

of  organization  shall  be  submitted  to  the  Attorney-General 
and,  if  it  is  in  conformity  to  law,  he  shall  so  certify  and 
endorse  his  approval  thereon.  The  organization  record 
shall,  upon  payment  of  the  organization  tax,  be  filed  in 
the  office  of  the  Secretary  of  State,  who  thereupon  issues 
a  certificate  of  incorporation.  The  existence  of  every  cor- 
poration begins  upon  the  filing  of  the  organization  record 
in  the  office  of  the  Secretary  of  State." 

"Cut  and  Dried"  Procedure.  —  While  the  procedure 
above  outlined  is  in  principle  that  required  of  law,  in  prac- 
tice much  of  the  work  of  actually  forming  the  modern 
corporation  is  turned  over  to  a  law  firm  or  some  corpora- 
tion that  specializes  in  that  service.  In  this  way  the  whole 
procedure  may  be  handled  in  a  "  cut  and  dried  "  way,  re- 
lieving the  incorporators  of  much  tedious  detail  and 
routine.  A  tentative  charter  with  "  dummy  "  incorpora- 
tors, —  namely  men  who  are  employees  of  the  law  firm  or 
organization  company  retained  to  organize  the  corpora- 
tion, —  may  be  employed.  Thus,  a  complete  "  dummy  " 
corporation  may  be  set  up  and  organized;  whereupon,  the 
charter  is  amended  by  substituting  the  real  charter  for  the 
tentative  one,  and  the  "  dummy  "  incorporators,  officers, 
etc.,  are  disposed  of  by  transferring  the  stock  to  which  they 
have  subscribed  to  the  real  incorporators.  This  is  the  pro- 
cedure that  has  been  followed  by  many  of  our  larger  cor- 
porations, notably  the  United  States  Steel  Corporation. 
A  careful  study  of  the  charter  of  this  corporation  given  in 
Part  VI  of  the  text  will  make  this  method  of  incorporation 
clear. 

The  Charter 

No  uniform  practice  of  nomenclature  relative  to  this 
document  is  to  be  found  in  the  state  incorporation  laws. 
In  some  of  them  it  is  designated  as  the  certificate  of  incor- 
poration, in  others  as  the  articles  of  associatioii  or  articles 
of  incorporation  and  in  still  others  as  the  charter. 


158     SECURITIES-ISSUING    ORGANIZATIONS 

The  charter  is  to  the  corporation  what  the  constitution 
is  to  the  state,  namely,  a  fundamental  limitation  upon  its 
powers.  Since  the  corporation  may  do  only  those  things 
that  it  is  specifically  authorized  to  do,  it  is  needless  to 
point  out  the  importance  of  the  exercise  of  great  care  in 
framing  its  clauses.  In  drawing  up  a  charter,  it  is  not  a 
question  of  obtaining  from  the  state  all  the  powers  and 
privileges  that  may  seem  desirable,  but  rather  the  maxi- 
mum that  may  be  obtained  within  such  restrictions  as  are 
imposed  by  the  state  constitution  and  the  general  or  special 
incorporation  laws.  Powers  in  excess  of  such  legal  limi- 
tations, even  though  granted  in  the  charter,  are  held  by  the 
courts  to  be  non-operative.  Again,  powers,  not  granted  in 
the  charter,  when  exercised  by  the  corporation,  are  held  to 
be  acts  ultra  vires,  and  are  non-enforceable.  These  two 
considerations  are  the  guides  that  the  incorporators  must 
follow  in  framing  their  charter. 

The  present-day  policy  of  the  courts  in  interpreting  the 
charter  powers  of  corporations,  appears  to  have  become 
much  more  inclined  toward  liberalism  than  in  former  years. 
The  attitude  taken  is,  that  by  granting  a  charter  the  state 
intended  to  create  an  artificial  person  capable  of  perform- 
ing the  purpose  for  which  it  was  organized;  and  any  slight 
deficiency  in  the  charter  which,  if  interpreted  strictly, 
would  prevent  the  proper  functioning  of  the  corporation,  is 
now  commonly  held  not  to  debar  it.  Nevertheless,  it  is 
always  better  to  provide  for  all  of  the  powers  necessary  in 
the  charter. 

Main    Features    and    Provisions.  —  Most    incorporation 

laws  prescribe  in  general  terms  what  the  charter  must  set 

forth.    Its  contents,  however,  are  by  no  means  restricted  to 

such   requirements.     In  practically   all   cases   the   charter 

must    contain   brief    statements    on   the    points    discussed 

below.^ 

3  The  specimen  charters  given  in  Part  VI  should  be  carefully 
studied  section  by  section  in  connection  with  discussion  in  the  text. 


THE    CORPORATION  —  FORMATION,    ETC.    159 

1.  Name  of  the  Corporation.  —  Every  corporation  has  a 
proprietary  interest  in  its  name  just  as  it  might  have  in 
a  trade-mark  or  a  grant  of  patent.  Within  the  granting 
jurisdiction  this  name  may  not  be  assumed  by  any  other 
corporation.  This  rule,  however,  has  its  exceptions.  In 
Rhode  Island  and  South  Carolina  a  foreign  corporation 
of  the  same  name  as  a  domestic  corporation  may  be  per- 
mitted to  enter  the  state  and  to  do  business  there.  In  the 
former  state  a  domestic  corporation  may  also,  with  the 
consent  of  an  old  corporation  that  is  to  be  dissolved,  assume 
the  name  of  the  latter.  But  these  practices  are,  by  no 
means,  of  general  occurrence.  In  nearly  all  states  the 
name  must  end  with  some  word  such  as  ''  company,"  "  as- 
sociation," "  corporation,"  or  "  limited."  The  purpose  of 
this  requirement  is  to  protect  those  who  do  business  with 
the  corporation  so  that  they  may  know  the  nature  of  the 
organization  with  which  they  are  dealing. 

2.  Location  of  the  Main  Office.  —  In  most  of  the  states 
the  laws  require  that  the  corporation  shall  establish  and 
maintain  its  main  office  in  the  state  that  has  granted  the 
charter.  At  this  office  must  be  kept  certain  books  and 
records.  In  many  of  the  states,  the  meetings  of  stock- 
holders and  board  of  directors  must  be  held  there,  and 
there  must  also  be  found  in  this  office  an  agent,  through 
whom  any  legal  process  or  action  against  the  corporation 
may  be  brought.  Where  required,  the  name  of  such  resi- 
dent agent  is  given  in  this  section  of  the  charter. 

3.  Object  and  Purpose.  —  The  section  of  the  charter  de- 
fining the  object  and  purpose  of  the  corporation  is  of  ex- 
treme importance.  This  cannot  be  changed  at  will  as 
expedience  may  seem  to  dictate,  and  if  it  does  not  embrace 
all  things  contemplated,  it  may  become  a  stumblingblock 
in  the  way  of  business  expansion.  The  present-day  tend- 
ency with  respect  to  objects  of  the  corporation  is  to  make 
them  as  comprehensive  as  permissible,  and  in  this  way  to 


160     SECURITIES-ISSUING    ORGANIZATIONS 

approach  as  nearly  as  possible  the  wide  sphere  of  activity 
in  business  enjoyed  by  natural  persons.  A  common  prac- 
tice is  to  divide  this  clause  into  three  parts;  the  first 
describing  in  specific  and  general  terms  the  nature  of  the 
business  to  be  undertaken,  the  second,  to  give  the  cor- 
poration power  to  own  and  enjoy  possession  of  real 
property,  and  the  third  to  give  it  as  nearly  as  possible  the 
powers  of  a  natural  person.  This  is  well  illustrated  by  the 
following  object  clause  for  a  mining  and  manufacturing 
corporation:^ 

1.  To  engage  in  mining  of  all  kinds;    manufacturing  of  all 

kinds;  building  of  houses,  structures,  vessels,  ships,  boats, 
railroads,  engines,  cars  or  other  equipment,  wharves  or 
docks,  and  to  own  and  operate  the  same. 

2.  To  lease,  buy,  sell,  use  and  hold  all  property,  real  or  per- 

sonal, as  may  be  necessary  or  convenient  in  connection 
with  the  said  business. 

3.  To  do  any  or  all  things  set  forth  in  this  certificate  as  objects, 

purposes,  powers  or  otherwise,  to  the  same  extent  and 
as  fully  as  natural  persons  might  do  and  in  any  part  of 
the  world. 

4.  Capital  Stock.  —  This  clause  gives  the  total  amount 
of  the  capital  stock  that  the  corporation  is  authorized  to 
issue,  the  classes  into  which  it  is  divided  and  the  rights 
that  the  holders  of  each  class  enjoy.  When  only  par 
value  stock  is  to  be  issued,  the  amount  of  the  capital  stock 
will  be  given  as  a  stated  sum,  say,  $1,000,000.  divided  into 
10,000  shares  of  the  par  value  of  $100.  per  share.  Then,  if 
two  classes,  such  as  common  and  preferred  stock,  are  to  be 
used,  the  number  of  shares  and  the  amount  of  each  class 
is  stated,  together  with  a  clear  description  of  the  rights  of 
holders.  When  stock  without  par  value  is  used,  the  number 
of  such  shares  and  the  amount  of  the  paid-in  capital  with 

*  See  also  the  special  object  clauses  given  in  Part  VI. 


THE    CORPORATION  —  FORMATION,    ETC.  161 

which  the  corporation  is  to  commence  business  must  be 
given.  It  is  also  possible  to  provide  for  both  par  value  and 
non-par  value  stock,  as  well  as  for  several  classes  of  each 
kind.  The  classification  of  common  stock,  as  for  example 
into  voting  and  non-voting,  is  not  allowable  in  all  of  the 
states,  but  may  be  provided  for  in  the  by-laws  by  unani- 
mous consent  of  the  stockholders.  Such  classifications  are 
frequently  employed  in  reorganizing  a  partnership.  On 
the  whole,  the  charter  provisions  relative  to  capital  stock 
are  simple,  and  it  may  be  itdded  that  simplicity  is  desira- 
ble. Where  many  classes  of  stock  are  issued  the  tend- 
ency is  toward  the  development  of  group  interests  among 
the  stockholders  which  may  reflect  unfavorably  upon  any 
concerted  action  on  the  part  of  all  interested  in  the  business. 

5.  Incorporators.  —  In  all  of  the  states  it  is  required  that 
the  charter  give  the  names  and  places  of  residence  of  each 
of  the  orig:inal  subscribers  to  the  capital  stock,  and  the 
number  of  shares  subscribed  for  by  each.  Where  one  of  the 
conditions  prerequisite  to  the  granting  of  the  charter  is 
that  a  certain  per  cent  of  the  capital  stock  shall  be  sub- 
scribed to  and  paid  in,  this  section  is  important. 

6.  Duration.  —  This  section  simply  states  the  period  for 
which  the  charter  is  granted,  either  for  a  period  of  years 
or  in  perpetuity. 

7.  Liability.  —  Although  not  required,  a  statement  of  the 
liability  that  the  stockholders  assume  is  frequently  in- 
serted, especially  in  charters  granted  by  states  that  impose 
double  liability. 

8.  Directors.  —  There  is  always  a  section  of  the  charter 
devoted  to  the  directors.  In  its  briefest  form,  this  simply 
sets  forth  the  number  of  directors  and  their  qualifications. 
These  qualifications  vary  greatly,  but  it  is  quite  common 
to  require  that  at  least  one  director  shall  be  a  resident  of 
the  state  of  incorporation,  and  that  a  person  to  be  eligible 
to  hold  the  position  of  director  must  be  the  holder  of  at 
least  one  share  of  stock. 


162      SECURITIES-ISSUING    ORGANIZATIONS 

As  the  authority  of  the  board  of  directors  under  the  com- 
mon law  extends  to  all  subjects  connected  with  the  manage- 
ment of  the  corporate  affairs,  any  restrictions  upon  this 
wide  power  should  be  provided  for  by  inserting  them  either 
in  the  charter  or  in  the  by-laws.  The  more  important  ones 
are  commonly  found  in  the  charter,  for  example,  provi- 
sions limiting  the  power  of  directors  to  sell  or  mortgage 
the  property  of  the  corporation,  to  incur  indebtedness,  to 
pass  by-laws,  etc. 

Classification  of  directors  so  that  their  terms  of  office  do 
not  all  expire  at  the  same  time  is  desirable  and  is  usually 
provided  for  in  the  charter.  Its  aim  is  to  secure  a  stability 
of  management. 

If  the  board  of  directors  is  large,  it  may  be  found  ad- 
visable to  provide  for  standing  committees  composed  of 
members  of  the  board.  They  may  be  provided  for  in  the 
charter  or  in  the  by-laws.  Two  such  committees  are 
usually  found,  an  executive  committee  and  a  finance  com- 
mittee, the  former  exercising  general  powers  of  direction 
and  the  latter  acting  on  matters  pertaining  to  finance. 

9.  Special  Provisions.  —  The  general  corporation  laws 
of  the  states  up  to  1896  were  not  very  liberal  in  the  powers 
granted  under  them.  They  sought,  as  it  were,  to  cast 
all  corporations  in  the  same  mold,  which  of  itself  was 
sufficient  to  prevent  broad  freedom  of  action  and  flexibility 
in  structure  of  the  corporate  organization.  The  first 
marked  change  in  this  policy  came  with  the  passage  of 
the  New  Jersey  act  of  that  year.  To  this  act  was  added, 
two  years  later,  the  following  clause:  "  The  certificate  of  in- 
corporation may  also  contain  any  provision  which  the  in- 
corporators may  choose  to  insert,  for  the  regulation  of 
the  business  and  for  the  conduct  of  the  affairs  of  the  cor- 
poration, and  any  provision  creating,  defining,  limiting  and 
regulating  the  powers  of  the  corporation,  the  directors  and 
the  stockholders,  or  any  class  or  classes  of  stockholders; 


THE    CORPORATION  —  FORMATION,    ETC.    163 

provided  such  provision  be  not  inconsistent  with  this  act." 
Other  states  soon  followed  suit,  notably,  Delaware,  Maine, 
West  Virginia  and  to  a  less  extent  New  York.^ 

Such  provisions  as  the  above,  and  others,  make  it  possi- 
ble to  insert  clauses  into  the  charter  vesting  the  corpora- 
tion with  special  powers  and  providing  for  special  features 
which  otherwise  would  have  to  be  taken  care  of  as  well 
as  possible  in  the  by-laws. 

Among  the  objects  that  are  usual  subjects  for  special 
provision  clauses  are  the  classification  of  directors,  the 
limitation  of  directors'  power  to  incur  debts  or  to  sell 
the  assets  of  the  corporation,  cumulative  or  other  methods 
of  voting,  limitations  on  salaries  of  officers,  sub-classifi- 
cation of  stock,  and  power  to  own  the  stock  and  securities 
of  other  corporations. 

By-Laws 

The  underlying  statutes  and  the  charter  of  the  corpora- 
tion are  usually  supplemented  by  an  additional  set  of 
rules  and  regulations  called  by-laws.  These  not  only  de- 
termine to  a  considerable  extent  the  details  of  the  form  of 
organization  that  the  corporation  is  to  employ,  but  also 
serve  at  the  same  time  as  a  guide  setting  forth  the  rules 
of  procedure  that  are  to  govern  the  stockholders,  directors 
and  officers  in  carrying  out  the  various  functions  of  the 
corporation,  In  a  small  corporation  whose  stockholders 
are  few  in  number  and  for  the  most  part  serve  on  the  board 
of  directors,  there  is  little  need  of  a  set  of  by-laws;  but  in 
the  case  of  a  large  corporation  whose  stockholders  may 
run  into  the  thousands,  and  whose  board  of  directors  may 
consist  of  well  over  a  score  of  members,  a  set  of  by-laws 
drawn  up  with  great  care  and  foresight,  even  with  respect 
to  fine  points  of  detail,  is  almost  indispensable.    Practically 

^  T.  Conyngton,  Corporate  Organization  and  Maiiagement,  pp. 
172,  173. 


164.     SECURITIES-ISSUING    ORGANIZATIONS 

all  of  the  larger 'corporations  have  very  complete  by-laws. 

Purpose  and  Adoption.  —  The  by-laws,  in  most  cases, 
emanate  from  the  stockholders.  It  is  only  by  laying  down 
a  more  or  less  rigid  set  of  rules  and  regulations  governing 
the  qualifications  and  functions  of  the  directors  and  officers 
that  the  stockholders  may  retain  a  semblance  of  control 
over  the  functioning  of  the  impersonal  organization  that 
they  have  interposed  between  themselves  and  their  business 
property.  Here,  then,  we  find  the  chief  purpose  of  the  by- 
laws, namely,  to  protect  the  stockholders  of  the  corpora- 
tion as  far  as  possible  against  the  unlawful  or  unauthorized 
acts  of  its  directors,  officers  and  agents. 

In  the  great  majority  of  the  states  the  power  to  adopt 
by-laws  is  reserved  to  the  stockholders,  who  may  ordinarily 
adopt  or  amend  them  at  any  regular  meeting  in  ac- 
cordance with  the  statutes,  the  charter  and  such  rules  as 
may  have  been  previously  adopted.  A  few  exceptions  to 
this  general  rule  can,  however,  be  noted:  in  Illinois  the 
statutes  give  the  directors  the  power  to  make  and  amend 
by-laws  to  the  exclusion  of  the  stockholders;^  under  cor- 
poration laws  modeled  after  the  laws  of  New  Jersey  the 
charter  may  be  so  worded  as  to  give  the  directors  power 
to  adopt  by-laws,  and  in  New  York  the  statutes  give  the 
directors  power  to  adopt  by-laws  not  inconsistent  with 
those  passed  by  the  stockholders.  Taken  by-and-large 
these  exceptions  seem  to  be  diametrically  opposed  to  the 
theory  of  impersonal  organization  for  business  purposes. 
This  leaves  the  advisability  of  such  a  practice  open  to 
serious  doubt;  the  more  so,  in  view  of  the  extremely  lax 
qualifications  for  directors. 

The  by-laws,  when  used,  are  usually  prepared  in  ad- 
vance of  the  first  meeting  of  stockholders  by  the  incorpora- 
tors or  their  attorney,  and  are  read  and  adopted  by  a 
majority   (or  a  two-thirds)  vote  of  the  outstanding  stock. 

6  Conyngton,  Corporate  Organization  and  Management,  p.  192. 


THE    CORPORATION  —  FORMATION,    ETC.    165 

Once  adopted  they  may  be  amended  at  any  regular  meeting. 
Contents.  —  The  content  of  corporate  by-laws,  in  so  far 
as  the  general  subject  matter  is  concerned,  has  become 
fairly  well  stereotyped  and  standardized.  Complete  sets, 
ready  for  use,  can  be  furnished  at  a  moment's  notice  by  any 
reputable  attorney  who  specializes  in  corporate  organiza- 
tion. The  topics  ordinarily  treated  may  be  classified  as 
follows: 

1.  Stockholders 

2.  Directors 

3.  Standing  Committees  (if  any) 

4.  Officers 

5.  Stock 

6.  Dividends  and  Finance 

7.  Sundry  Provisions 

8.  Amendments 

Under  each  of  the  above  titles  are  usually  included  in 
brief  and  succinct  form  the  more  salient  provisions  of  the 
statutes  of  the  state  of  incorporation,  the  provisions  of 
the  charter  and  such  other  additional  regulations  pertinent 
to  the  subject  as  may  be  deemed  necessary. 

The  discussion  and  explanation  of  the  several  subjects 
treated  in  the  by-laws,  and  enumerated  above,  are  so 
closely  connected  with  a  description  of  the  functioning  of 
the  corporation  that  it  is  thought  best  to  leave  them  for 
the  next  chapter.'' 

7  A  full  reprint  of  the  By-Laws  of  the  United  States  Steel  Cor- 
poration is  given  in  Part  VI,  Form  31. 


CHAPTER   X 
THE    CORPORATION  — ITS    OPERATING    MECHANISM 

The  principle  underlying  the  operating  mechanism  of 
the  corporation  is  characteristic  of  the  securities-issuing 
organization.  It  consists  of  the  separation  of  the  three 
functions  of  ownership,  dir'^ction  and  management,  and 
their  delegation  to  three  legally  distinct  bodies  respec- 
tively, the  stockholders,  the  board  of  directors  and  the 
officers.^  The  duties,  obligations,  right  and  privileges  of 
each  body  are  generally  clearly  defined  by  statutory  law 
and  by  sections  in  the  charter  or  by-laws  of  the  corpora- 
tion. 

The  corporation  cannot  well  dispense  with  any  one  of 
these  three  bodies.  Though  at  times  their  personnel  is 
identical,  as  in  the  case  of  a  small  close  corporation  whose 
stockholders  are  so  few  that  all  are  at  the  same  time  on 
the  board  of  directors  and  serve  also  as  officers.  In  such 
cases,  confusion  frequently  results  through  laxness  in  ob- 
serving the  provisions  of  the  law  or  of  the  charter  dele- 
gating to  each  body  its  distinct  duties  and  powers.  Thus 
the  persons  interested  in  the  corporation  often  fail  to 
keep  proper  records,  or  do  not  distinguish  clearly  whether 
action  was  taken  by  the  stockholders,  by  the  directors  or 
by  the  officers.  Such  actions  as  these  are  irregular  and 
might  lead  the  corporation  into  difficulties.    Large  corpora- 

1  This  is  the  American  practice.  In  England,  the  checking  up  on 
operation  is  done  l)y  indeiicndent  auditors;  while  in  Germany,  a  su- 
pervising board  is  prescribed  in  addition  to  the  board  of  directors, 
stockholders  and  officers,  and  independent  auditing  also  is  provided 
for. 

166 


THE    CORPORATION  —  OPERATION         167 

tions  take  great  care  to  follow  the  letter  of  the  law  in  all 
these  matters,  and  invariably  employ  an  attorney  to  give 
them  the  necessary  legal  advice. 

The  Stockholders 

The  body  of  stockholders  of  the  corporation  constitutes 
the  entrepreneurial  element  in  the  organization.  It  consists 
of  all  persons,  natural  and  artificial,  who  are  the  rightful 
owners  of  at  least  one  share  of  the  corporation's  stock. 
There  is  no  restriction  as  to  who  may  become  a  stock- 
holder, except  in  those  states  that  prohibit  one  corporation 
from  holding  the  stock  of  another.^  The  ease  of  trans- 
ferring shares,  coupled  with  the  relatively  wide  range  of 
potential  stockholders,  results  in  a  continual  change  in  the 
personnel  of  the  body  of  stockholders,  particularly  in  the 
case  of  the  larger  corporations.  This  condition  is  well 
illustrated  by  reference  to  the  table  showing  the  percent- 
age of  turnover  of  stock  of  some  large  American  corpora- 
tions. Each  sale  of  stock  effects  a  change  in  the  personnel 
of  the  body  of  stockholders.  The  reports  of  the  United 
States  Steel  Corporation,  giving  the  number  of  common 
stockholders  receiving  dividends  each  quarter  year,  are 
also  illustrative  of  this  point. 

The  following  table  shows  the  number  of  common  stock- 
holders of  the  United  States  Steel  Corporation  for  each 
quarter  from  1915  to  1920: 


Year 

4th  Quarter 

3rd  Quarter 

2nd  Quarter 

1st  Quarter 

1920 

90,952 

87,229 

83,583 

1919 

73,318 

73,456 

74,071 

78,018 

1918 

72,779 

65,862 

63,507 

61,044 

1917 

51,689 

44,789 

43,482 

42,564 

1916 

37,720 

40,430 

41,156 

41,910 

1915 

45,767 

51,169 

55,907 

56,825 

2  This 

was, 

with  certain  exceptions, 

the  law  in  New 

Jersey  from 

1913  to  1920. 

168     SECURITIES-ISSUING    ORGANIZATIONS 

The  fluctuation  is  very  largely  the  result  of  market  con- 
ditions. It  tends  to  increase  as  the  dividends  and  quotations 
of  market  prices  rise,  and  vice-versa.  In  small  corpora- 
tions, where  the  stock  is  generally  closely  held,  these  fluc- 
tuations are  not  common,  unless  the  enterprise  is  of  a 
highly  speculative  character,  as  in  oil  and  mining  develop- 
ment undertakings.  A  glance  at  the  accompanying  chart 
shows  us  how  widely  the  stockholders  of  large  corporations 
are  distributed  over  the  country. 

Distribution  of  Stockholders  of  Swift  &  Company: 


(Courtesy  of  Swift  &  Company) 

As  entrepreneurs  of  the  business,  the  stockholders 
naturally  assume  the  major  portion  of  the  risk  of  loss;  and, 
in  consequence,  they  enjoy  also  the  right  to  any  profits  that 
the  business  may  produce.  Theoretically,  they  exercise  the 
same  function  in  connection  with  the  operation  of  the  cor- 
poration as  do  the  enfranchised  citizens  in  the  operation  of 
the  state  or  municipality.  But  they  are  no  more  the  corpo- 
ration itself  than  are  the  citizens  the  state.  They  are  the 
final  arbiters  of  its  destiny,  the  beneficiaries  of  its  successes 
and  the  victims  of  its  failure. 

Powers  of  Stockholders  as  a  Body.  —  The  rights  of  the 


THE    CORPORATION  —  OPERATION        169 

individual  stockholder  should  be  carefully  distinguished 
from  the  powers  of  the  stockholders  as  a  body.  The  rights 
referred  to  have  already  been  discussed  in  a  preceding 
chapter.  The  stockholders  can  act  as  a  body  only  when 
properly  brought  together  in  regular  and  special  meetings. 
Their  powers  on  behalf  of  the  corporation,  when  they  are 
thus  assembled,  are,  in  most  states,  clearly  defined  by 
statutes  and  are  usually  also  restated  in  the  by-laws  of  the 
corporation.  Among  these  powers,  those  that  stand  out 
most  prominently  are  the  following: 

1.  To  adopt  a  seal 

2.  To  elect  directors  and  to  remove  them  for  cause 

3.  To  adopt  and  to  amend  by-laws 

4.  To  authorize  the  issuance  of  stock 

5.  To  amend  the  charter  (effective  only  when  sanctioned  by 

the  state) 

6.  To  dissolve  the  corporation   (also  requires  state  sanction) 

7.  To  sell  or  mortgage  the  entire  assets  of  the  corporation 

Classification  and  Qualification.  —  Whenever  a  corpora- 
tion issues  more  than  one  class  of  stock,  its  stockholders 
are  thereby  divided  into  as  many  classes  as  there  are 
kinds  of  stock.  The  special  rights,  privileges  and  powers 
that  the  holder  of  any  class  of  stock  enjoys,  are  clearly 
defined  in  the  stock  certificate  or  in  the  charter  or  by-laws. 
This  is  necessary  because  of  the  general  rule  that  holders 
of  preferred  stock  are  held  to  have  all  the  same  rights, 
privileges  and  powers  as  common  stockholders  with  such 
additions  and  limitations  as  are  specifically  granted  in  the 
creating  clause  of  the  charter  or  by-laws.  This  rule  holds 
whether  they  are  considered  as  individuals  or  as  a  body. 
In  large  corporations  it  is  quite  generally  the  custom  to 
provide  for  at  least  two,  and  frequently  three  or  more, 
classes  of  stock  and  hence  for  as  many  classes  of  stock- 
holders.    This   practice  has   at   times   been   ill-advisedly 


170     SECURITIES-ISSUING    ORGANIZATIONS 

adopted  with  serious  consequences  to  the  corporation  and 
especially  to  the  common  stockholders,  as  in  the  case  of  the 
United  States  Leather  Company.^  What  advantage  stock 
classification  may  offer  in  matters  of  finance  is  frequently 
discounted  by  the  fact  that  it  tends  to  make  the  interests  of 
the  various  classes  of  stockholders  opposed  to  one  another, 
and  thus  destroys  the  solidarity  of  the  body. 

Stockholders  of  Record.  —  While  it  is,  broadly  speaking, 
correct  to  say  that  anyone  who  owns  a  share  of  stock  in 
a  corporation  is  a  stockholder  in  it,  it  is,  nevertheless,  in- 
correct to  assume  that  he  thereby  becomes  privileged  to 
participate  in  the  deliberations  of  the  body  of  stockholders. 
Something  more  than  mere  ownership  of  stock  is  required 
for  this.  He  must  be  not  only  a  stockholder,  but  also  a 
stockholder  of  record;  this  means  that  his  name,  to- 
gether with  the  amount  of  stock  and  the  numbers  of  the 
certificates  that  he  holds,  must  appear  on  the  official  stock 
ledger  and  transfer  books  of  the  corporation.  These  books 
are  in  the  hands  of  the  secretary,  who  is  required  to  note 
therein  all  issues  and  transfers  of  stock,  so  that  he  may 
know  who  is  entitled  to  participate  in  stockholders'  meet- 
ings and  dividends;  and  it  is  to  the  stockholders  of  record 
only  that  the  secretary  sends  out  notices  of  meetings  and 
the  declaration  of  dividends.  These  books  are  usually 
closed  a  fixed  number  of  days  before  the  stockholders' 
annual  meeting  is  to  take  place  or  dividends  are  to  be 
declared,  in  order  that  no  question  may  arise  as  to  who  is 
entitled  to  participate.  The  date  of  closing  the  books  is 
fixed  by  the  by-laws. 

Transfer  Agent  and  Registrar. — The  work  of  maintain- 
ing an  accurate  record  of  all  transfers  of  stock,  especially 
in  large  corporations,  may  become  quite  onerous.  In  such 
cases,  a  transfer  agent  and  a  registrar  are  found  to  be 

3  See  Dewing,  Corporate  Promotions  and  Reorganizations. 
pp.  16-49. 


THE    CORPORATION  —  OPERATION  171 

almost  indispensable  —  the  transfer  agent  to  keep  a  record 
of  transfers  and  the  registrar  to  certify  to  the  correctness  of 
the  roll.  The  authority  to  employ  these  agents  is  given  in 
the  by-laws,  which  frequently  even  designate  some  trust 
company  to  perform  both  services.  In  this  way  a  certi- 
fied list  of  stockholders  can  always  be  secured  when 
desired. 

Stockholders'  Meetings.  —  The  body  of  stockholders  has 
one  regular  meeting  yearly,  called  the  annual  meeting;  and 
in  addition  thereto  such  other  special  meetings  as  may  be 
found  necessary.  The  annual  meeting  is  ordinarily  the 
most  important  function  for  the  stockholders.  It  is  at  this 
meeting  that  they  elect  directors  for  the  ensuing  year, 
amend  or  adopt  new  by-laws  and  consider  and  act  upon 
any  matters  whatever,  concerning  the  corporation,  that 
come  within  their  scope  of  action  and  are  properly  brought 
before  them.  The  date  for  holding  the  meeting  is  fixed  by 
the  by-laws,  and  is,  therefore,  generally  known  to  the  stock- 
holders. But  to  make  sure  that  all  stockholders  of  record 
are  notified  the  by-laws  usually  provide  that  the  secretary 
shall,  upon  a  definite  date  before  the  meeting  is  to  take 
place,  close  the  books  and  send  out  a  general  call  and 
notice  *  to  all  stockholders  of  record.  The  rules  of  pro- 
cedure that  are  to  govern  the  meeting  are  usually  inserted 
in  the  by-laws,  but  need  not  be  rigidly  adhered  to.  They 
commonly  prescribe  who  shall  be  the  presiding  officers,  in 
what  order  business  shall  be  conducted,  what  shall  consti- 
tute a  quorum  and  what  method  of  voting  shall  be  used. 

Officers.  —  Usually  the  president  and  the  secretary  of 
the  corporation  act  as  presiding  officer  and  recording  secre- 
tary of  all  stockholders'  meetings,  though  this  practice  is 
not  universal.  Infrequently  the  body  of  stockholders 
chooses  its  own  officers  at  each  meeting. 

Quorum.  —  In  many  of  the  states  the  proportion  of  the 

*  See  Forms 


172     SECURITIES-ISSUING    ORGANIZATIONS 

outstanding  stock  that  must  be  represented  at  a  stock- 
holders' meeting  to  constitute  a  quorum,  is  fixed  by  law. 
Where  this  is  not  done,  the  common  law  rule  holds  that 
those  present,  regardless  of  the  amount  of  stock  they  repre- 
sent, constitute  a  quorum  to  transact  business  or  elect  direc- 
tors. The  question,  however,  generally  is  considered  to  be  of 
sufficient  importance  to  merit  a  by-law  provision,  in  which 
the  quorum  for  the  transaction  of  business  is  commonly 
fixed  at  a  majority  of  the  outstanding  stock,  while  for  the 
election  of  directors  those  present,  regardless  of  numbers 
or  the  amount  of  stock  represented,  are  held  to  be  sufficient. 
This  arrangement  is  in  widespread  use  among  corpora- 
tions chartered  under  the  laws  of  the  state  of  New  York. 
Such  matters  as  the  amendment  of  the  charter,  the  sale 
of  the  entire  assets  and  the  dissolution  of  the  corporation 
under  many  state  laws  require  at  least  a  two-thirds 
majority  of  all  outstanding  stock.  They  thus  require  a 
quorum  equally  large. 

Method  of  Voting.  —  Several  different  methods  of  voting 
at  stockholders'  meetings  are  in  use.  Among  these,  the 
ones  most  commonly  found  in  this  country  are  the  straight 
ballot  and  the  cumulative  method.  In  addition  to  these 
two  plans,  there  is  in  use  in  England  a  third  which  is  best 
described  as  a  regressive  plan. 

The  straight  ballot  plan  provides  for  the  casting  by  the 
stockholder  of  one  vote  for  each  share  of  stock  in  his  pos- 
session upon  each  motion  placed  before  the  body  of  stock- 
holders at  any  meeting.  In  electing  directors  each  vacancy 
is  filled  separately.  A  bare  majority  under  this  plan  is 
sufficient  to  elect  a  director,  to  amend  the  by-laws  or  to 
carry  a  motion  relating  to  the  transaction  of  ordinary  busi- 
ness. Thus  anyone  who  can  secure  control  over  more  than 
fifty  per  cent  of  the  outstanding  stock,  is  in  a  position  to 
impose  his  will  upon  the  minority  stockholders  in  these 
matters.     For  the  election  of  directors,  where  the  stock 


THE    CORPORATION  —  OPERATION         173 

represented  constitutes  a  quorum,  twenty  to  thirty  per  cent, 
and  even  less,  is  frequently  sufficient  to  elect.  But  the 
majority  can  usually  retain  control  and  easily  regain  it  if 
it  happens  to  be  lost.  This  system  may,  thus,  exclude  the 
minority  stockholders  from  any  representation  on  the  board 
of  directors,  and  therein  lies  its  greatest  weakness. 

The  cumulative  plan  of  voting  is  now  quite  general,  though 
its  use  is  confined  to  the  election  of  directors.  In  some 
states  the  statutes  provide  that  it  shall  be  used  in  such 
elections;  in  Colorado,  it  must  be  employed  unless  some 
other  plan  is  provided  for  in  the  charter,  and  in  nearly  all 
of  the  states  it  is  permissible.  Under  this  plan  the  stock- 
holder is  entitled  to  cast  one  vote  for  each  share  of  stock 
that  he  holds  for  each  director  to  be  elected.  These  votes 
need  not  be  cast  separately  for  each  place  to  be  filled,  but 
may  be  cast  together  for  a  single  candidate.  This  enables 
an  organized  minority  to  concentrate  its  votes  upon  one  or 
two  candidates  agreed  upon,  with  a  reasonable  assurance 
that  it  can  elect  them,  thus  securing  minority  representa- 
tion on  the  board  of  directors.  A  large  well  organized 
minority  can  even  wrest  the  control  of  the  board  from  a 
poorly  organized,  scattered  majority  by  properly  distribut- 
ing its  votes.  For  example:  Three  directors  are  to  be 
elected.  The  minority  stockholders,  controlling  45  per  cent 
of  the  total  number  of  votes,  agree  to  concentrate  upon 
two  candidates,  A  and  B;  while  the  majority,  controlling 
55  per  cent,  try  to  fill  all  three  places  with  C,  D  and  E. 
The  percentage  of  votes  received  by  the  candidates  is  as 
follows: 


A 

B 

C 

D 

E 

Minority 

23 

22 

— 

— 

— 

Majority 

— 

— 

25 

14 

16 

Thus,  the  majority  stockholders  will  have  filled  but  one 
place  out  of  the  three  by  scattering  their  votes  too  much. 


174     SECURITIES-ISSUING    ORGANIZATIONS 

Had  they  been  content  with  two  places,  they  could  easily 
have  secured  them. 

The  English  regressive  or  differential  plan  is  based  on  a 
relative  diminution  of  voting  power  with  a  progressive  in- 
crease in  shares  held.  Thus,  a  person  holding  50  shares,  or 
less,  of  stock,  has  one  vote  for  each  share.  If  he  holds  more 
than  50  and  less  than  100  shares,  he  has  one  vote  for  each 
of  50  shares  and  one  vote  for  every  2  shares  above  that 
number.  For  all  shares  above  100  and  under  150  in  number 
he  has  one  vote  for  every  3  shares,  and  so  on.  The  purpose 
of  this  plan  is  to  give  greater  power  to  the  minority,  which 
ordinarily  consists  of  stockholders  whose  individual  hold- 
ings are  small.  The  complexity  of  the  plan  militates 
against  its  use;  and  though  permissible,  its  use  in  this 
country  is  very  rare. 

Voting  by  Proxy.  —  It  is  the  common  law  rule  that  the 
stockholder  must  attend  meetings  in  person  to  exercise  his 
voting  riglit.  In  some  of  the  states  there  are  statutes  that 
permit  him  to  delegate  this  right  to  another  person  when  he 
cannot,  or  does  not  himself  desire  to  attend.  Where  no 
such  statutes  exist,  a  charter  and  by-law  provision  will 
usually  have  the  same  effect.  The  instrument  by  means  of 
which  the  voting  right  is  delegated  to  another  is  a  power  of 
attorney,  called  a  proxy.  The  proxy  must  authorize  a 
specified  person  to  represent  the  stockholder  at  one  or  more 
meetings.  It  may  authorize  him  to  vote  upon  all,  or  only 
upon  certain  specified  matters;  and  it  may  permit  him  to 
exercise  his  own  judgment  in  voting  or  prescribe  how  the 
votes  are  to  be  cast.  Under  many  statutes,  the  length  of 
life  of  the  proxy  is  limited  by  a  provision  requiring  that  it 
be  executed  within  a  certain  number  of  months  preceding 
the  date  of  the  meeting.  Under  the  federal  law  a  small 
tax  must  be  paid  on  all  proxies.  It  is  customary  to  refer 
to  the  person  to  whom  the  voting  power  is  delegated  as 
"  the  proxy."  Any  person  who  is  competent  at  law  to 
act  as  agent  may  act  as  proxy. 


THE    CORPORATION  —  OPERATION         175 

Stockholders'  Voting  Trusts.  —  The  principle  of  placing 
property  in  the  hands  of  a  trustee,  to  be  managed  by  hira 
for  the  benefit  of  the  original  holder,  is  well  recognized  at 
law.  The  stockholders  of  a  corporation  frequently  avail 
themselves  of  the  trust  agreement  to  conserve  certain 
special  interests,  to  retain  control  of  the  corporation  in  the 
hands  of  the  majority  or  more  effectively  to  protect  the 
interests  of  the  minority  or  some  class  for  a  consecutive 
term  of  years.  These  trusts  are  formed  by  vesting  the  title 
to  the  stock  in  one  or  more  trustees,  who  thereupon  issue 
to  the  stockholders  entering  the  trust,  trustees'  certificates 
representing  the  number  of  shares  deposited.  The  trustees 
thus  become  possessed  of  all  the  rights  of  stockholders  in- 
cluding the  right  to  vote  and  to  receive  dividends,  and  their 
names  appear  on  the  stock  transfer  books  as  the  right- 
ful owners  of  the  shares  of  stock  deposited  with  them. 
They  must  vote,  dispose  of  dividends  and  otherwise  act  as 
stockholders  of  the  corporation  in  strict  accord  with  the 
terms  of  the  trust  agreement  entered  into  between  them- 
selves and  the  participating  stockholders.  While  the  agree- 
ment is  in  force,  the  trustees  must  keep  the  securities  in- 
tact, cast  the  votes  en-bloc  and  otherwise  treat  the  trust 
property  as  a  unit  until  such  time  as  the  trust  agreement 
expires,  or  the  trust  is  dissolved  by  mutual  consent  or  as 
provided  for  in  the  agreement.  Such  voting  trusts  are  also 
frequently  known  as  "  stock  pools." 

Voting  trusts  are  expressly  sanctioned  by  the  laws  of  the 
states  of  New  York  and  Maryland,  and  have  been  de- 
clared lawful  in  many  other  states.  It  is  the  opinion  of  an 
eminent  corporation  lawyer  "  that  a  voting  trust,  reason- 
able as  to  its  duration  and  equitable  as  to  its  purpose, 
would  be  sustained  in  any  state  of  the  Union."  ^  When  the 
voting  trust  is  employed  to  bring  two  or  more  corpora- 

5  Thomas  Conyngton,  Corporate  Organization  and  Management, 
p.  449. 


176     SECURITIES-ISSUING    ORGANIZATIONS 

tions  under  the  close  control  and  supervision  of  a  small 
group  of  trustees,  it  becomes  a  combination  trust.  This 
type,  as  in  the  case  of  the  old  Standard  Oil  Trust,  quite 
generally  has  been  declared  illegal  on  the  ground  that  such 
a  trust  divests  the  stockholders  and  directors  of  the  cor- 
porations of  their  control  over  them. 

Protection  of  Minority  Stockholders.  —  From  what  has 
been  said  relative  to  the  body  of  stockholders,  it  is  apparent 
that  the  minority  stockholders  have  little  or  no  influence 
in  determining  the  basic  policies  upon  which  the  operation 
of  the  corporation  must  rest.  This  fact  is  at  the  same  time 
one  of  the  weakest  and  strongest  features  of  the  corporate 
form  of  organization.  The  great  advantage  of  the  majority 
rule  plan  lies  in  the  decisiveness  and  continuity  with  which 
an  action',  once  decided  upon,  may  be  carried  through.  The 
minority  stockholder  has,  ordinarily,  only  one  of  two  al- 
ternatives to  follow:  He  may  either  accept  the  majority's 
decision,  or  sever  his  connection  with  the  enterprise  by 
disposing  of  his  stock. 

After  the  corporation  has  once  been  formed  and  put 
into  operation,  there  is  little  chance  that  any  special 
minority  interest  will  be  safeguarded  or  protected.  If  it 
is  at  all  desirable  to  protect  special  minority  interests  — 
as  frequently  is  the  case  in  transforming  a  partnership 
where  the  interests  of  the  several  partners  vary  and  must 
be  preserved  in  the  corporate  form  —  this  should  be  done 
when  the  charter  is  prepared.  At  that  stage  of  incorpora- 
tion proceedings,  it  is  possible  in  several  ways  to  conserve 
special  rights  and  privileges  of  the  several  partners,  par- 
ticularly in  the  matter  of  preserving  an  equal  voice  in  the 
management  in  the  face  of  unequal  capital  investments  and 
special  limitations  on  the  capital  risk.  Among  the  special 
organization  features  that  are  most  frequently  employed 
for  this  purpose  are  the  following: 


THE    CORPORATION  —  OPERATION  177 

1.  Special  kinds  of  preferred  stock 

2.  Classification  of  common  stock  into  voting  and  non-voting 

classes,  or  into  blocks  each  of  which  is  given  power  to 
elect  a  specified  number  of  directors 

3.  Cumulative  voting 

4.  Special  majorities  to  authorize  certain  acts  such  as  the  sale 

or  hypothecation  of  the  assets,  etc. 

It  is  obvious  that  the  majority  stockholders  have  the 
power  to  control  the  policies  of  their  corporation.  Such  an 
arrangement  is  unquestionably  just  and  right.  To  be  sure, 
they  cannot  exercise  this  power  for  the  purpose  of  discrimi- 
nating against  the  minority,  but  must  exercise  it  to  foster 
what  in  their  opinion  is  to  the  best  interest  of  the  corpora- 
tion. If  they  do  otherwise,  they  may  be  brought  before 
the  courts  for  violation  of  law.  Any  protracted  struggle 
between  the  majority  and  minority  interests  of  a  corpora- 
tion will  result  only  in  impairing  its  chance  of  success  and 
may  ultimately  result  in  its  ruin.  The  minority  stock- 
holders, in  such  cases,  are  not  obliged  to  retain  their  shares. 
If  they  are  dissatisfied  with  the  majority  policy  they  had 
better  sell  their  stock  rather  than  to  launch  a  campaign  of 
obstruction  and  hindrance.  If,  therefore,  special  rights 
and  privileges  attached  to  the  person  of  the  entrepreneur 
are  to  be  preserved,  this  is  much  more  satisfactorily  ac- 
complished through  the  use  of  special  types  of  personal 
ownership  organization  than  through  the  corporation, 
whose  highly  impersonal  character  makes  it  less  adaptable 
to  such  a  purpose. 

The  Board  of  Directors 

The  Function  of  the  Board  of  Directors.  —  It  is  through 
the  exercise  of  authority  and  power  vested  in  the  board  of 
directors  that  the  business  corporation  becomes  a  live  en- 
trepreneurial organization.     Without  a  board  of  directors 


178     SECURITIES-ISSUING    ORGANIZATIONS 

the  business  corporation  cannot  function.  The  function 
of  the  board,  then,  is  to  manage  the  corporation  and  to 
direct  its  operations  within  the  scope  of  the  broad  lines  of 
policy  laid  down  by  the  stockholders.  This  function  of 
management,  coupled  with  custodianship  of  the  property 
of  the  corporation,  places  the  members  of  the  board,  col- 
lectively and  individually,  in  the  position  of  trustees  of  the 
corporation;  and  as  such,  they  may  have  no  interests  ad- 
verse to  those  of  their  company. 

Election,  Term  of  OfBce,  Etc.  —  The  members  of  the 
board  of  directors  are  elected  by  the  stockholders  at  the 
annual  meeting  of  the  latter  body.  The  procedure  to  be 
followed  in  such  elections  has  already  been  described  in 
the  preceding  section  of  this  chapter  and  need  not  be  re- 
stated here. 

The  term  of  office  of  directors  is  ordinarily  one  year;  but 
the  incumbent  continues  to  serve  and  to  perform  the  duties 
of  the  office  until  a  successor  is  elected  and  qualifies.  Thus, 
if  for  any  reason  the  stockholders  neglect  to  hold  an  annual 
meeting  or  pass  over  the  election  of  directors,  the  whole 
existing  board  would  continue  to  serve.  In  small  corpora- 
tions whose  stock  is  closely  held  by  but  a  few  stockholders 
it  is  quite  common  in  this  w^ay  to  permit  a  board  of  direc- 
tors to  continue  in  office  for  several  years  without  change. 
This  practically  makes  the  board  a  self-perpetuating  body, 
for  any  vacancies  that  occur  between  stockholders'  meet- 
ings may  be  filled  by  the  remaining  members  of  the  board. 

Classification  of  directors  is  often  resorted  to  in  order  to 
minimize  the  probability  of  sudden  changes  in  managerial 
policy.  Such  classifications  usually  provide  for  a  three 
year  term  for  directors,  and  divide  the  body  into  three 
sections  so  that  the  terms  of  the  members  of  one  section 
will  expire  each  consecutive  year.  This  practice,  however, 
is  confined  very  largely  to  those  corporations  that  have  a' 
relatively  large  board.    Where  the  board  is  small  it  would 


THE    CORPORATION  —  OPERATION         179 

serve  no  purpose.  For  such  a  classification  see  the  charter 
of  the  United  States  Steel  Corporation  in  Part  VI. 

If  for  any  reason,  the  stockholders  desire  to  remove  a 
duly  elected  and  qualified  director,  they  have  that  power 
within  certain  limitations.  Under  common  law  rules  they 
can  remove  him  for  good  cause  only  and  must  give  him  an 
opportunity  to  be  heard  and  to  defend  himself  at  the  stock- 
holders' meeting.  The  common-law  rule  is  modified  in 
many  states  by  statutes  permitting  the  removal  of  direc- 
tors more  or  less  at  will  by  a  majority  vote  of  the  stock- 
holders at  regular  or  special  meetings  called  especially  for 
that  purpose.  The  same  freedom  in  the  removal  of  direc- 
tors may  also  be  secured  through  charter  or  by-law  provi- 
sions; and  such  provisions  are  very  frequently  found. 

Number  and  Qualifications  of  Directors.  —  The  statutes 
of  most  states  prescribe  a  minimum  number  of  directors, 
three  and  five  being  the  more  common.  A  few  state  laws 
establish  also  a  maximum  number,  as  in  Colorado.  In 
practice  there  is  a  wide  range  extending  from  three  to  thirty 
and  even  more.  Whenever  possible  an  odd  number  is 
chosen,  because  this  will  prevent  a  tie  vote.  Tie  votes 
in  the  board  of  directors  are  not  only  annoying  but  also 
detrimental  to  the  best  interests  of  the  corporation.  A 
board  that,  due  to  its  organization,  cannot  agree  upon  a 
decisive  action  is  useless  to  the  corporation.  However,  in 
corporations  that  have  been  formed  from  partnerships  it 
is  frequently  desirable  to  have  an  even  number  of  direc- 
tors in  order  to  preserve  an  equal  share  in  the  management 
of  the  reorganized  business;  but  this  is  possible  only  in 
those  states  whose  laws  do  not  prescribe  an  odd  number. 

The  qualifications  for  the  office  of  director  of  a  corpora- 
tion are  few.  At  common  law  any  natural  person  who 
has  attained  his  full  legal  rights  may  be  elected  to  the 
board.  In  nearty  all  of  the  states,  the  statutes  now  modify 
this  rule  by  requiring  a  director  to  be  the  owner  of  at  least 


180      SECURITIES-ISSUING    ORGANIZATIONS 

one  share  of  the  corporation's  stock.  This  requirement  is 
little  more  than  a  legal  formality.  Any  hireling  who  may 
legally  enter  into  a  contract  may  be  presented  with  a 
single  share  of  stock  to  qualify  him  for  a  place  on  the 
board  of  directors,  be  elected  to  that  place  and  then  be  re- 
quired to  vote  as  directed  or  ordered  by  the  interests  that 
placed  him  there,  and  be  paid  for  his  services  in  the  bar- 
gain. Such  a  director  is  called  a  dummy  director.  Dummy 
directors  are  frequently  employed  to  round  out  the  re- 
quired number  of  directors  in  corporations  formed  from 
partnerships,  and  also  where  state  laws  require  that  at 
least  one  director  be  a  resident  of  the  state  of  incorpora- 
tion. The  stock  ownership  qualification  is  of  such  small 
moment  that  it  might  as  well  be  done  away  with.  Rhode 
Island,  in  its  recently  adopted  corporation  laws  omitted 
it  entirely.  In  Massachusetts,  in  1919,  it  was  modified 
so  that  a  manufacturing  corporation  may,  through  by-law 
provision,  arrange  for  the  nomination  and  election  by  its 
employees  or  one  or  more  of  their  number  to  membership 
on  the  board  of  directors.*' 

Residence  within  the  state  of  incorporation  for  at  least 
one  director  is  also  a  common  requirement  which  is  easily 
complied  with  through  the  use  of  a  dummy.  The  demand 
for  dummies  for  this  purpose  has  become  so  great  in  such 
states  as  Delaware  and  New  Jersey  that  a  corporation 
has  been  formed  whose  purpose  it  is  to  supply  them  to 
outside  corporations  incorporated  under  the  laws  of  these 
states.  It  has  happened  that  dummies  of  this  type  have 
had  the  deciding  voice  on  the  board  in  case  of  a  tie  vote 
of  contending  factions. 

In  addition  to  these  general  qualifications,  a  number  of 
the  states  require  that  at  least  one,  and  sometimes  more, 
of  the  directors  must  be  citizens  of  the  United  States.    In 

'^  New  Jersey  corporations  were  authorized  to  do  the  same  thing 
in  1920. 


THE    CORPORATION  —  OPERATION        181 

the  absence  of  such  a  provision  an  alien  may  qualify  under 
the  common  law. 

Compensation.  —  The  directors  of  a  corporation  may  re- 
ceive compensation  as  provided  for  in  the  statutes,  the 
charter  or  the  by-laws.  Regular  salaries,  while  not 
generally  prohibited,  are  unconmion.  The  usual  practice 
is  to  pay  directors  a  nominal  sum  for  each  meeting;  these 
sums  range  from  five  to  twenty-five  dollars;  in  most  small 
corporations,  however,  directors  serve  without  compen- 
sation. 

The  Individual  Director's  Relation  to  the  Corporation. — 
In  the  external  relations  of  the  corporation,  the  individual 
director  plays  no  role.  He  has  no  greater  power  to  bind 
the  corporation  in  contracts  than  the  individual  stockholder. 
Any  attempt  on  his  part  to  enter  into  a  contract  on  behalf 
of  the  corporation  without  special  delegation  of  au^^hority 
by  the  board  of  directors  would  be,  as  far  as  he  is  con-^ 
cerned,  an  act  ultra  vires,  or  beyond  his  powers,  which 
would  make  him  individually  liable. 

In  connection  with  the  internal  relations  of  the  corpora- 
tion the  individual  director  possesses  certain  rights  and 
privileges  not  enjoyed  by  the  individual  stockholder.  How- 
ever, even  these  are  restricted  to  such  rights  and  privileges 
as  are  of  themselves  necessary  to  enable  the  director  to 
familiarize  himself  with  the  corporation's  affairs,  so  that 
he  may  act  intelligently  on  its  behalf.  Thus,  he  has  the 
right  to  inspect  all  of  the  books,  records  and  accounts  of 
the  corporation  as  well  as  its  property,  and  also  to  be 
notified  of,  and  to  participate  in,  all  directors'  meetings  and 
meetings  of  standing  committees.  The  right  of  the  director 
to  inspect  books,  records,  etc.,  is  much  broader  and  more 
comprehensive  than  that  of  the  stockholder,  for  he  must 
know  the  condition  of  the  physical  as  well  as  the  financial 
affairs  of  the  corporation  if  he  is  to  be  responsible  for  its 
management. 


182     SECURITIES-ISSUING    ORGANIZATIONS 

It  is  at  once  seen  that  the  individual  director,  as  such, 
possesses  no  special  rights  and  privileges  that  give  him 
any  direct  power  or  authority  to  manage  the  affairs  oi 
the  corporation.  This  must  be  done  through  the  board  of 
directors  acting  as  a  body. 

Powers  of  the  Board  of  Directors.  —  As  before  stated, 
the  function  of  the  board  of  directors  is  to  manage  the  cor- 
poration. To  enable  the  board  to  perform  this  function 
properly,  it  is  vested  with  wide  powers.  In  fact,  in  the 
board  of  directors  are  embodied  all  of  the  powers  that  the 
corporation  enjoys  by  virtue  of  having  been  created  an 
artificial  person;  and  the  board  exercises  them  to  the  ex- 
clusion of  the  body  of  stockholders  and  officers.  These 
powers  may  be  summarized  as  follows: 

1.  To  take  such  measures  consistent  with  law,  as  the  directors 

may  deem  advisable  for  the  proper  management  of  the 
corporation 

2.  To  delegate  the  exercise  of  managerial  authority  to  others 

3.  To  adopt  a  stock  certificate  and  to  issue  stock 

4.  To  declare  dividends 

5.  To  fill  vacancies  on  the  board 

6.  To   exercise   certain   miscellaneous   and   special   powers   by 

virtue  of  by-law  provisions. 

Power  to  Manage.  —  In  the  exercise  of  its  managerial 
power,  the  board  of  directors  is  authorized  to  plan  and 
build  up  the  administrative  and  operating  force  of  the 
corporation;  to  select  the  sites  and  location  of  its  estab- 
lishments ;  to  erect,  operate  and  maintain  the  physical  plant 
and  equipment;  to  enter  into  all  contracts  on  behalf  of  the 
corporation;  and  to  determine  and  carry  out  its  financial 
policy. 

It  is,  of  course,  incumbent  upon  the  directors  to  exercise 
such  discretion  and  caution  in  these  matters  as  might  be 
taken  by  any  prudent  business  man.  They  cannot  wil- 
fully  and   knowingly    waste   the   corporation's    assets   or 


THE    CORPORATION  —  OPERATION        183 

employ  them  for  their  own  private  gain  without  incurring 
a  personal  liability  toward  the  creditors  and  the  stock- 
holders. But,  with  the  exception  just  noted,  the  limitations 
upon  the  free  exercise  of  managerial  powers  through 
statutes  are  few  and  unimportant.  If  it  is  deemed  ad- 
visable or  necessary  to  limit  it  in  any  way,  this  is  usually 
done  through  charter  and  by-law  provisions.  Among  limi- 
tations of  this  sort  are  cormnonly  found  such  as  require  an 
extra  majority  of  the  board  to  incur  expenditures  above 
a  certain  specified  amount;  that  prescribe  maximum  limits 
for  salaries  of  officers,  directors  and  agents,  or  that  limit 
the  indebtedness  that  the  directors  shall  be  permitted  to 
incur. 

Delegation  of  Authority.  —  Under  the  common  law  the 
directors  are  obliged  to  attend  in  person  to  managerial 
matters;  they  cannot  delegate  this  authority  to  others. 
This  rule  may  be  changed  by  statute,  charter  provisions  or 
by-laws.  The  ordinary  practice  now  isi  to  permit  the 
directors  to  delegate  the  exercise  of  their  managerial 
authority,  either  in  whole  or  in  part,  to  a  select  group  of 
their  nmnber  or  to  agents;  though  in  so  doing  they  do  not 
relieve  themselves  of  responsiblity  for  the  acts  of  such 
agents.  To  relinquish  responsibility  they  would  have  to 
resign  from  the  board. 

The  powers  of  the  board  may  be  delegated  to  a  single 
director  to  be  exercised  by  him  within  such  bounds  of  dis- 
cretion as  the  board  may  determine.  This  would  make  him 
a  managing  director.  Except  during  directors'  meetings  he 
becomes  the  supreme  manager  of  the  business,  having 
control  over  the  entire  operation  of  the  business  including 
authority  over  the  officers.  The  managing  director  is  most 
commonly  found  in  small  corporations  where  one  man  is 
familiar  wdth  the  details  of  technique  and  operation  w^hile 
the  others  are  merely  contributors  of  funds. 

In  large  corporations  the  board  of  directors  frequently 


184     SECURITIES-ISSUING    ORGANIZATIONS 

has  from  twenty-five  to  thirty  or  more  members.  They  are 
usually  busy  men  whose  interests  are  so  varied  that  they 
can  devote  little  time  to  board  meetings.  Consequently  it 
is  at  times  difficult  to  secure  a  quorum.  It  is  also  quite  cer- 
tain that  some  members  of  the  board  will  be  experts  in 
finance  while  others  have  exceptional  executive  ability  and 
still  others  may  have  little  knowledge  of  the  problems  con- 
nected with  the  business.  In  such  cases,  it  is  found  desira- 
ble to  delegate  authority  over  executive  matters  and  finance 
to  special  committees  made  up  of  a  small  number  of 
especially  qualified  men  chosen  by  the  board  from  among 
its  members.  In  this  way  are  constituted  the  executive 
committee  and  the  finance  committee  of  the  board  of  direc- 
tors. These  committees  cannot,  however,  delegate  any 
authority  vested  in  them  to  others  but  are  directly  responsi- 
ble to  the  board  for  their  actions.  Any  member  of  the 
board  has  full  right  to  sit  in  at  any  of  their  meetings.  The 
number  of  directors  that  is  to  compose  the  committees,  the 
procedure  in  appointing  them  and  the  powers  given  them 
are  usually  carefully  set  forth  in  the  by-laws  of  the  corpora- 
tion." 

The  ordinary  duties  of  supervision  of  the  operation  and 
administration  of  the  corporation,  while  they  are  by  law 
vested  in  the  board  of  directors,  are  by  that  body  usually 
delegated  to  officers  chosen  for  that  purpose.  The  duties, 
powers  and  obligations  of  these  officers  will  be  reserved  for 
discussion  in  the  last  part  of  this  chapter. 

Power  to  Fill  Vacancies.  —  Whenever  any  vacancy  oc- 
curs on  the  board  of  directors  such  vacancy  may  be  filled 
by  the  remaining  members  of  the  board  for  the  unexpired 
term.  A  majority  vote  of  the  full  board  is  ordinarily  re- 
quired for  this  purpose,  but  through  by-law  provision  an 
extra  majority  may  be  required  with  a  view  to  protecting 
the  minority  interests. 

'  Tliis  is  well  illustrated  by  the  by-laws  of  the  United  States 
Steel  Corporation  given  in  Part  VI. 


THE    CORPORATION  —  OPERATION        185 

Power  to  Declare  Dividends.  —  The  power  to  declare 
dividends  rests  exclusively  with  the  board  of  directors. 
This  is  perhaps  their  most  important  power.  It  is  by  the 
size  and  regularity  of  the  dividend  that  their  success  as 
managers  is  measured;  and  the  failure,  on  their  part,  to 
follow  carefully  provisions  of  law  governing  the  declara- 
tion of  dividends  may  make  them  both  civilly  and  crimi- 
nally liable  for  their  acts. 

Statutory  restrictions  upon  the  declaration  of  dividends 
are  few  and  clear,  but  strict.  The  cardinal  principle  which 
they  lay  down  is  that  dividends  must  be  declared  out  of 
surplus  or  net  profits.  They  cannot  be  declared  out  of 
capital  except  in  undertakings  that  are  of  a  wasting  nature 
as  mining,  quarrying,  oil  production  and  the  exploitation 
of  patents,  where  the  purpose  of  the  business  is  to  exhaust 
the  marketable  value.  If  for  any  reason,  including  losses 
and  depreciation,  the  capital  of  the  corporation  has  fallen 
below  what  was  originally  received  by  it  as  representing 
the  fair  value  of  the  stock  issued,  the  earnings  must  be  ap- 
plied toward  rounding  out  its  capital  and  cannot  be  dis- 
tributed as  dividends.  This  general  rule  has  been  adopted 
by  most  states  to  protect  not  only  the  creditors  of  the 
corporation,  but  its  stockholders  as  well.  However,  a  dis- 
tinction is  made  between  what  constitutes  the  capital  ac- 
count and  the  expense  account  of  the  corporation;  and  it 
is  the  general  rule  of  the  courts  to  hold  that  this  is  a 
matter  for  business  men  to  determine.  Directors  fre- 
quently take  advantage  of  this  in  order  to  declare  dividends 
as  often  as  possible  at  the  risk  of  impairing  the  future 
earning  power  of  their  corporation. 

The  by-laws  of  the  corporation  usually  restate  very 
briefly  the  statutory  provisions  of  the  state  of  incorpora- 
tion relative  to  the  declaration  of  dividends,  and  in  many 
cases  prescribe  the  procedure  that  is  to  be  followed  by  the 
directors  when  dividends  are  to  be  declared.    An  example 


186     SECURITIES-ISSUING    ORGANIZATIONS 

of  the  latter  type  is  found  in  the  by-laws  of  the  United 
States  Steel  Corporation  given  in  Part  VI. 

The  procedure  that  is  followed  in  the  larger  corporations 
ia  declaring  dividends,  is  about  as  follows:  First,  a  state- 
ment is  secured  from  the  treasurer  to  ascertain  whether  the 
net  earnings  are  sufficient  to  declare  a  dividend.  Second, 
in  case  the  net  earnings  are  sufficient  the  dividend  is  de- 
clared by  a  formal  resolution  of  the  directors.  This  reso- 
lution usually  sets  forth  that  the  directors  of  the  corpora- 
tion have  declared  a  dividend  of  a  specified  per  cent  of  the 
par  value  of  the  stock,  to  be  paid  on  a  specified  date  to 
stockholders  of  record,  as  of  a  date  five  to  ten  days  in  ad- 
vance of  the  date  of  payment.  Sometimes  the  dividend  is 
stated  as  so  many  dollars  per  share  as  would  be  necessary 
with  non-par  value  stock  or  for  any  other  reason.  Third, 
notice  is  thereupon  given  the  stockholders,  and  is  usually 
also  published  in  the  newspapers,  although  the  latter  act 
is  not  required.  Fourth,  the  secretary  of  the  corporation 
closes  the  stock  transfer  books,  which  then  furnish  the 
treasurer  with  a  list  of  stockholders  who  are  to  receive 
the  dividend.  Fifth,  the  treasurer  pays  the  dividend  on  the 
specified  date,  usually  by  check  so  marked  as  to  indicate 
that  it  is  a  dividend,  and  in  this  way  receives  the  check 
as  a  receipt  from  the  stockholder  when  it  has  been  endorsed 
by  him. 

Kinds  of  Dividends.  —  The  ordinary  dividend  is  paid  in 
money  and  is  called  a  cash  dividend.  Dividends  may,  how- 
ever, be  paid  in  some  form  other  than  money;  as  for  ex- 
ample, in  the  form  of  stock  of  the  corporation,  bonds  issued 
by  it,  its  scrip  or  its  property. 

If  the  dividend  is  in  the  corporation's  stock,  it  is  called 
a  stock  dividend.  The  mere  distribution  of  unissued  or 
treasury  stock  pro  rata  among  the  stockholders,  does  not 
constitute  a  stock  dividend,  but  merely  watered  stock.  The 
amount  of  stock  to  be  issued  through  a  stock  dividend  is 


THE    CORPORATION  —  OPERATION         18T 

determined  by  the  net  earnings  available  for  distribution 
as  dividends.  Instead  of  giving  to  each  stockholder  a 
cash  dividend,  the  corporation  retains  the  net  earnings  as  a 
sort  of  additional  investment  pro-rated  among  the  stock- 
holders, and  distributes  from  its  unissued  stock  a  sufficient 
number  of  shares  at  par  to  equal  the  total  of  the  declared 
dividend.  The  corporation  thereby  increases  its  outstand- 
ing securities  by  the  amount  of  the  stock  dividend.  Under 
a  decision  of  the  United  States  Supreme  Court,  handed 
down  in  March  1920,  stock  dividends  are  not  income  tax- 
able under  the  Federal  Income  Tax.  As  a  result  of  this 
decision  there  were  issued  by  some  129  corporations  and 
companies,  between  March  1920  and  January  1,  1921,  stock 
dividends  aggregating  $777,875,932.  Some  of  these  con- 
cerns in  this  way  increased  their  capitalization  four-fold. 
Such  a  procedure  may  have  the  effect  of  unduly  reducing 
the  working  capital  by  transferring  surplus  to  invested  capi- 
tal and  some  of  our  corporations,  particularly  one  large 
rubber  company,  have  been  severely  criticised  on  this 
score. 

Bond  dividends  paid  to  the  stockholders  in  the  form  of  the 
corporation's  own  bonds  would  have  the  same  effect  as  a 
forced,  long-time  loan,  because  the  dividends,  when  once  de- 
clared, make  the  stockholders  creditors  of  the  corporation 
to  the  amount  of  the  dividend.  If  the  corporation  then 
gives  them  its  bonds,  they  remain  creditors  until  the  prin- 
cipal is  paid.  This  practice  is  not  very  frequently  resorted 
to. 

Scrip  dividends  have  the  same  effect  as  bond  dividends; 
namely,  they  make  creditors  out  of  the  stockholders.  The 
scrip  given  the  stockholder  is  merely  a  non-interest  bearing 
promise  to  pay.  It  has  usually  but  a  short  tenor  and  is 
made  payable  in  cash. 

Property  dividends  have  the  same  effect  as  though  the 
assets  of  the  corporation  were  distributed  in  whole  or  in 


188     SECURITIES-ISSUING    ORGANIZATIONS 

part.  They  are  possible  only  where  the  property  is  divisi- 
ble into  units  or  parcels,  as  land  or  the  owned  securities  of 
other  corporations.  Many  corporations,  which,  during  the 
recent  war  made  heavy  purchases  of  government  bonds, 
have  distributed  them  among  their  stockholders  in  the  form 
of  property  dividends. 

Illegal  Dividends.  —  Whatever  form  the  dividend  may 
take,  it  must  be  equal  for  every  share  of  stock  of  a  given 
class  and  must  be  distributed  to  the  several  classes  in  the 
order  of  their  claims  to  priority.  Failure  on  the  part  of  the 
directors  to  observe  this  principle,  or  to  guard  against  im- 
pairing the  capital  of  the  corporation  or  to  conform  to 
charter  and  by-law  provisions  in  the  declaration  of  divi- 
dends makes  the  dividend  illegal.  Any  stockholder  may 
enjoin  them  from  paying  such  a  dividend  and  may  hold 
them  personally  liable  for  their  acts.  But  dissenting  direc- 
tors may  protect  themselves  by  having  their  dissenting 
votes  recorded  on  the  minutes  of  the  directors'  meeting. 

Other  Powers  of  Directors.  —  The  board  of  directors 
is  frequently  empowered  to  mortgage  the  property  of  the 
corporation.  When  granted,  this  power  is  usually  limited 
by  requiring  a  two-thirds  or  three-fourths  majority  vote 
of  the  entire  board  as  well  as  by  fixing  the  maximum 
amount  of  indebtedness  that  may  be  incurred. 

In  a  few  states,  such  as  New  York  and  Illinois,  the 
directors  may  also  be  given  power  to  adopt  by-laws  gov- 
erning their  own  actions. 

Meetings  of  the  Board.  —  Ordinarily  the  by-laws  of  the 
larger  corporations  provide  that  the  board  of  directors 
shall  have  one  regular  meeting  monthly  and  such  special 
meetings  as  may  be  deemed  necessary.  The  procedure  in 
these  meetings  is  similar  to  that  followed  in  stockholders' 
meetings.  Usually  the  president  of  the  corporation  presides, 
and  the  secretary  acts  as  secretary  of  the  board  meeting, 
but  this  practice  is  not  universal.    In  the  New  York  Cen- 


THE    CORPORATION  —  OPERATION         189 

tral  and  Hudson  River  Railroad  Company  there  is  a  special 
presiding  oflEicer  called  the  chairman  of  the  board  of  direc- 
tors. The  standing  committees  may  be  called  upon  by  their 
chairmen  to  meet  much  more  frequently  than  the  entire 
board  and  their  procedure  is  usually  somewhat  less  formal. 

The  Corporate  Officers 

The  function  of  the  officers  of  the  corporation  is  pri- 
marily that  of  administration.  They  constitute  the  bind- 
ing link  between  the  entrepreneurial  and  the  administrative 
organizations,  thus  making  a  live  business  unit  out  of  the 
artificial  person  of  the  corporation.  They  are  at  one  and 
the  same  time  the  agents  of  the  board  of  directors  and  of 
the  corporation.  Unless  otherwise  stipulated  in  the  statutes, 
charter  or  by-laws,  they  are  directly  responsible  to  the 
directors  for  all  official  acts  and  are  absolutely  controlled 
by  the  board. 

As  the  work  of  corporate  administration  may  be  readily 
subdivided  into  such  functions  as  (a)  executive  direction, 
(b)  custodianship,  (c)  secretarial  services,  (d)  check  on 
performance  and  (e)  legal  services,  the  officers  are  usually 
selected  with  a  view  to  meeting  the  requirements  of  the 
corporation  in  these  matters.  In  practically  all  corpora- 
tions there  is  need  of  permanent  officers  to  perform  the  first 
three  of  these  functions.  The  necessity  for  the  exercise  of 
the  others  may  arise  only  occasionally.  Hence,  permanent 
officers  are  not  always  employed  to  look  after  that  work, 
temporary  assistants  being  employed  by  the  board  of  direc- 
tors as  the  occasion  demands. 

The  statutes  of  the  states  are  generally  silent  concerning 
the  officers  of  the  corporation  other  than  directors,  who  are 
frequently  called  officers.  Even  the  charter  seldom  con- 
tains clauses  bearing  on  them.  For  this  reason  the  by-laws 
should — and  as  a  rule  do — go  into  considerable  detail  con- 
cerning officers.    They  usually  stipulate  the  names  by  which 


190     SECURITIES-ISSUING    ORGANIZATIONS 

the  officers  shall  be  known,  by  whom  they  shall  be  chosen 
or  appointed,  what  qualifications,  if  any,  they  shall  possess, 
the  length  of  their  term  of  office  and  the  functions  and 
duties  that  are  assigned  to  them.  Any  rules  or  regulations 
upon  these  points  may  ordinarily  be  adopted  by  the  stock- 
holders or  may  even  be  left  to  the  discretion  of  the  direc- 
tors. The  prevailing  elasticity  and  freedom  of  action  in 
the  adjustment  of  these  matters,  has!  resulted  in  the  adapta- 
tion of  the  staff  of  officers  to  the  size  of  the  corporation 
as  well  as  to  the  nature  of  the  business  in  which  it  is 
engaged. 

As  a  rule  the  directors  appoint,  or  elect,  the  officers  of  the 
corporation  and  also  control  them  during  their  incumbency. 
Unless  otherwise  provided  in  the  by-law^s,  they  need  not  be 
stockholders;  but  where  they  are  to  serve  on  the  standing 
committees  of  the  board  of  directors,  they  must,  of  course, 
qualify  as  directors.  Their  term  of  office  is  usually  co- 
terminous with  that  of  the  directors  or  for  a  period  of  one 
year.  Provision  is  also  made  for  their  removal  at  the  will 
of  the  appointing  body,  in  order  that  they  may  be  more 
easily  controlled  and  their  actions  brougjit  into  harmony 
with  the  policies  of  the  board  of  directors. 

General  Executive  Officers.  —  Ordinarily  the  president 
of  the  corporation  is  its  chief  executive  officer  entrusted 
with  the  supervision  and  direction  of  its  operations.  He 
is  usually  made  directly  responsible  for  this  work  to  the 
board  of  directors,  but  in  some  corporations  he  is  subor- 
dinate to  a  managing  director,  in  which  case,  much  of  the 
power  and  authority  ordinarily  vested  in  him  may  be  ex- 
ercised by  his  superior.  In  addition  to  these  duties  he  may 
also  be  the  presiding  officer  at  stockholders'  and  directors' 
meetings  and  chairman  of  the  executive  committee  of  the 
board.  One  of  the  most  important  duties  is  to  prepare  an- 
nual reports  on  the  corporation's  affairs  for  the  directors 
and  the  stockholders. 


THE    CORPORATION  —  OPERATION        191 

Where  the  corporation  is  large,  it  is  frequently  found  to 
be  advisable  to  supply  the  president  with  one  or  more  vice- 
presidents  who  may  serve  as  his  immediate  administrative 
subordinates.  These  may  be  officially  designated  as  "  first/' 
"  second "  or  "  third  "  vice-president  according  to  their 
number.  In  some  corporations  the  office  of  vice-president 
is  merely  an  honorary  position  whose  incumbent  has  little 
to  do  with  the  general' administration,  while  in  others  the 
vice-presidents  are  the  active  and  responsible  heads  of  the 
administrative  departments  immediately  subordinate  to 
the  president  in  whom  the  general  supervisory  and  co- 
ordinating power  is  vested. 

When  the  position  of  vice-president  is  honorary  it  is 
customary  to  appoint  a  general  manager  and  to  make  him 
directly  responsible  to  the  president  for  the  operation  of 
the  business.  Where  the  board  of  directors  appoints  both 
the  general  manager  and  the  president  —  an  arrangement 
that  is  found  in  a  few  corporations  —  the  status  of  the 
president  assumes  more  the  character  of  a  nominal  as 
against  an  actual  executive  head. 

Treasurer.  —  The  treasurer  is  the  custodian  of  the 
corporate  funds,  securities  and  valuable  financial  docu- 
ments. It  is  also  his  duty  to  keep  the  corporation's  books 
of  account,  to  serve  as  its  responsible  agent  in  the  disburse- 
ment of  funds,  and  to  prepare  reports  concerning  the  finan- 
ces of  the  corporation  for  the  information  of  the  board  of 
directors  and  the  stockholders;  and  he  is  frequently  also 
required  to  participate  in  the  execution  of  instruments  of 
a  financial  character  such  as  notes,  bonds,  etc.,  issued  by 
the  corporation.  The  importance  of  his  position  shows 
great  variation.  In  some  corporations  he  is  little  more 
than  the  head  of  the  bookkeeping  and  accounting  depart- 
ment, while  in  others  he  is  made  chairman  of  the  finance 
committee  and  is  looked  upon  as  the  financial  advisor  of 
the  corporation. 


192     SECURITIES-ISSUING    ORGANIZATIONS 

It  is  obvious  that  the  nature  of  these  duties,  which  are 
usually  definitely  assigned  to  him  by  the  by-laws,  place  a 
heavy  burden  of  responsibility  upon  the  treasurer.  For 
this  reason  he  is  nearly  always  required  to  give  a  bond  of 
surety  to  indemnify  the  corporation  for  any  losses  arising 
from  misappropriation  of  funds  or  from  malfeasance  in 
office  or  carelessness  in  the  performance  of  his  duties.  The 
amount  of  his  bond  is  most  frequently  fixed  by  the  board 
of  directors  or  by  the  finance  committee. 

Much  of  the  liability  to  which  the  treasurer  is  open  has 
its  origin  in  common-law  rules  which,  however,  have  been 
quite  generally  enacted  into  statutes.  This  liability  is  for 
the  most  part  to  the  corporation  itself,  but  it  may  also  be  to 
the  individual  stockholders  in  case  these  sustain  a  direct 
personal  loss  through  his  acts.  Among  the  acts  of  the 
treasurer  that  give  rise  to  liability  may  be  enumerated  (a) 
neglect  or  non-performance  of  duties  and  (b)  faulty  per- 
formance of  duties,  such  as  incorrect  financial  statements 
and  reports  by  the  board  of  directors  or  by  the  finance 
committee. 

Secretary.  —  The  secretarial  services  of  which  the  cor- 
poration has  need  are  entrusted  to  its  secretary  who  is 
elected  by  the  board  of  directors.  He  is  practically  always 
the  secretary  of  the  board  as  well  as  the  official  secretary 
of  the  corporation,  and  very  frequently  also  serves  as  re- 
cording secretary  at  stockholders'  meetings.  His  mani- 
fold duties  include  among  others  the  following: 

1.  To   arrange   for   meeting   places   and   to   issue   notices   for 

regular  and  special  meetings  of  the  board  of  directors 
and  of  the  stockholders 

2.  To  make  and  to  ])reserve  accurate  and  complete  minutes 

of  the  proceedings  of  these  meetings 

3.  To  ]iroscrve  the  certified  copy  of  the  charter  of  the  cor- 

poration and  of  the  latest  revised  by-laws 

4.  To  issue  stock  certificates  as  directed  and  to  keep  an  ac- 

curate record  of  stockholders 


THE    CORPORATION  —  OPERATION        193 

5.  To  have  the  custody  of  the  corporate  seal  and  to  affix  it 

to  all  documents  requiring  the  official  signature  of  the 
corporation 

6.  To  cause  to  be  prepared  and  to  transmit  to  federal  and 

state    authorities   all   official    reports    required    of   the 
coriDoration. 

In  the  larger  corporations  this  multitude  of  duties  — 
most  of  which  must  be  performed  on  specified  dates  fixed 
by  the  statutes,  the  charter  and  the  by-laws  —  necessitates 
the  preparation  by  the  secretary  of  a  chronological 
schedule.  This  schedule  is  called  the  corporate  calendar. 
It  is  usually  in  the  form  of  a  book,  a  card  index  or  some 
other  form  or  memorandum  that  reminds  the  secretary  that 
on  a  specified  day  he  is  to  perform  certain  formal  matters 
pertaining  to  the  corporation's  official  business,  such  as 
the  mailing  of  notices  for  directors'  and  stockholders' 
meetings,  holding  such  meetings,  preparing  and  transmit- 
ting reports,  closing  and  reopening  the  stock  books,  paying 
dividends,  etc.  Such  a  calendar  is  almost  indispensable  to 
a  corporation  doing  a  broad  interstate  business  if  for  no 
other  reason,  because  of  the  great  number  of  state  reports 
that  are  required  of  it. 

For  the  proper  performance  of  most  of  the  duties 
enumerated  above,  the  secretary  is  required  to  keep  sepa- 
rate and  distinct  records.  These  with  the  addition  of 
the  books  of  account  maintained  by  the  treasurer,  com- 
prise the  corporate  books.  Among  them  the  most  impor- 
tant are  (a)  the  minute  book,  (b)  subscription  list,  (c) 
stock  certificate  book,  (d)  stock  ledger  and  transfer  book, 
and  (e)  the  dividend  book. 

In  the  minute  book  the  secretary  keeps  a  record  of  the 
proceedings  at  directors'  and  stockholders'  meetings.  Certi- 
fied copies  of  the  charter  and  the  by-laws  are  usually  in- 
scribed on  the  first  pages  of  the  book.  Accuracy  is  essen- 
tial in  recording  minutes  because  they  serve  as  legal  evi- 


194     SECURITIES-ISSUING    ORGANIZATIONS 

dence  in  court  proceedingvS.  In  most  instances  it  is  found 
advisable  to  keep  a  separate  minute  book  for  each  body. 

The  subscription  list  is  merely  a  record  of  subscriptions 
for  stock  made  by  stockholders  before  certificates  can  be 
issued.  Such  subscriptions  constitute  contracts  between 
the  corporation  and  the  subscribers,  and  the  latter  remain 
liable  until  the  terms  of  the  contract  are  fulfilled. 

The  stock  certificate  book  is  similar  to  a  check  book.  It 
contains  stock  certificates  with  corresponding  stubs  con- 
secutively numbered.  When  a  certificate  is  issued  by  the 
secretary  there  is  noted  on  the  stub  the  name  of  the  person 
to  whom  it  was  issued,  the  date  and  the  number  of  shares 
represented  by  the  certificate.  When  the  shares  are  trans- 
ferred the  old  certificate  is  surrendered  and  canceled  and 
a  new  one  is  issued.  When  a  certificate  is  destroyed  a  new 
one  may  be  issued  upon  proof  of  destruction  or  loss  of 
the  original  and  deposition  of  an  indemnity  bond  by  the 
claimant.  In  small  corporations  the  stock  certificate  book 
is  frequently  the  only  stock  record  that  is  maintained. 

The  stock  ledger  and  transfer  books  may  be  one  and  the 
same  book,  but  in  some  of  the  states  separate  books  are 
required  by  law.  Both  are  intended  to  preserve  an  ac- 
curate record  of  the  stockholders  and  of  the  stock  held  by 
them.  The  ledger  must  show  the  names  and  addresses  of 
the  stockholders  of  record,  alphabetically  arranged,  the 
amount  of  stock  held  and  from  wliom  and  when  it  was  ac- 
quired, and  to  whom  transfers,  if  any,  have  been  made  and 
when.  The  balance  of  stock  held  by  each  stockholder  as 
shown  by  the  ledger  determines  the  number  of  votes  to 
which  he  is  entitled  and  the  amount  of  dividends  that  he  is 
to  draw.  The  transfer  book  consists  usually  of  a  record  of 
transfers  together  with  the  actual  instruments  by  means  of 
which  transfers  were  effected,  bound  into  book  form.  The 
larger  corporations  ordinarily  keep  only  a  record  of  trans- 
fers and  leave  the  other  work  to  special  transfer  agents  and 
registrars  appointed  for  that  purpose. 


THE    CORPORATION  —  OPERATION        195 

The  rules  of  the  New  York  Stock  Exchange  require  that 
the  work  of  registration  and  transfer  shall  not  be  performed 
by  the  same  agency.  The  work  of  the  transfer  agent  con- 
sists of  examining  the  endorsements  or  titles  to  stock  certifi- 
cates which  are  transferred  from  one  owner  to  another. 
The  registrar  merely  records  the  transfers  and  registers  the 
securities  that  the  corporation  places  on  the  market.  To- 
day, trust  companies  make  a  specialty  of  both  of  these 
services  and  are  usually  designated  by  the  secretary  of  the 
corporation  to  act  as  its  agent  in  these  matters. 

The  dividend  book  supplies  a  record  of  all  dividends  on 
all  classes  of  stock  that  have  at  any  time  been  declared. 

Auditor  or  Comptroller.  —  It  is  neither  wise  nor  desira- 
ble that  the  stockholder  should  be  without  some  means  of 
checking  up  on  the  management  of  the  corporation.  This 
check  is  usually  supplied  through  a  general  auditing  of 
accounts.  Audits  are,  as  a  rule,  made  annually,  quarterly 
or  at  irregular  intervals.  In  Europe  the  auditing  must  be 
done  by  an  independent  auditor  who  is  usually  a  govern- 
ment official.  But  in  this  country  the  laws  do  not  provide 
for  independent  audits.  In  the  smaller  corporations  it  is 
the  practice  to  employ  public  accountants  to  perform  this 
service  as  it  is  deemed  necessary.  In  the  larger  corpora- 
tions the  auditor,  or  comptroller  as  he  is  also  called,  is  an 
officer  of  the  corporation.  His  duties  vary  greatly  from 
corporation  to  corporation.  Where  an  auditor  is  among  the 
officers,  the  treasurer's  work  is  confined  quite  largely  to 
custodianship  and  disbursement  of  the  funds,  while  the  ac- 
counting and  bookkeeping  is  in  the  hands  of  the  former. 
He  is  also  frequently  required  to  authorize  or  countersign 
all  vouchers  for  expenditures  before  the  treasurer  may  pay 
out  money  on  them.  The  whole  matter  is  one  of  adjust- 
ments that  are  prescribed  in  the  by-laws  or  by  the  directors. 

Counsel.  —  Practically  every  corporation  has  need  of 
legal  services  at  some  time.    Large  corporations  are  in  liti- 


196     SECURITIES-ISSUING    ORGANIZATIONS 

gation  most  of  the  time,  and  they  are  also  constantly  in 
need  of  legal  advice  to  guide  them  through  the  labyrinth  of 
laws  which  surround  them.  Most  large  corporations  conse- 
quently include  a  counsel  among  their  officers;  while  the 
smaller  ones  do  without  an  official  counsel,  but  usually  re- 
tain some  attorney  to  advise  them  as  the  need  arises. 

The  whole  structure  of  the  corporation,  thus,  rests  upon 
the  principle  of  a  representative  type  of  government  after 
which  it  is  closely  modeled.  To  be  sure,  it  makes  use  of  all 
of  the  advantages  that  the  principle  of  representation  offers 
in  a  most  admirable  way;  but  unfortunately,  chiefly  be- 
cause of  lack  of  proper  regulation  and  control  by  state 
governments  in  this  country,  it  has  been  too  frequently 
utilized  for  purposes  of  manipulation,  fraud  and  question- 
able practices.  The  next  chapter  will  be  devoted  to  a 
brief  presentation  of  this  aspect  of  the  corporate  form  of 
organization. 


CHAPTER   XI 
USE  OF   THE   BUSINESS  CORPORATION 

The  corporation  is  today,  without  question,  the  favorite 
form  of  ownership  organization  in  the  United  States  for 
business  establishments  of  moderate  and  large  size.  This 
preference  was  so  noticeable  among  manufacturing  estab- 
lishments in  1909  that  it  w^as  strongly  commented  upon  in 
the  Report  on  Manufactures  of  the  Bureau  of  the  Census 
in  that  year.  This  report  says:  "  The  most  important 
distinction  shown  is  that  between  corporate  and  all  other 
forms  of  ownership.  Of  the  total  number  of  establishments 
reported  as  engaged  in  manufacturing  industries  in  1909, 
25.9  per  cent  were  under  corporate  ownership.  The  corres- 
ponding figure  for  1904  was  23.6  per  cent.  While  corpora- 
tions thus  controlled  only  about  one-fourth  of  the  total 
number  of  establishments,  they  gave  employment  to  a 
large  proportion  of  all  wage  earners  reported,  namely,  75.6 
per  cent  in  1909  and  70.6  in  1904.  The  value  of  the  prod- 
ucts of  the  factories  operated  by  corporations  represented 
79  per  cent  of  the  total  value  of  products  for  all  establish- 
ments in  1909  and  73.7  per  cent  in  1904.  These  figures 
show  that  even  in  this  short  period  of  five  years  the  cor- 
porate form  of  ownership  increased  so  greatly  that  it  repre- 
sented an  appreciably  larger  proportion  of  the  manufactur- 
ing interests  of  the  country  in  1909  than  in  1904."  ^  But 
this  growth  in  the  use  of  the  corporate  form  of  ownership 
for  manufacturing  establishments,  is  still  continuing.  In 
1914  the  position  of  the  corporation  in  this  type  of  industry 
was  28.4  per  cent  of  the  number  of  establishments,  80.30  per 

1  Thirteenth  Census  of  the  United  States— Abstract  (1909),  p.  461. 

197 


198     SECURITIES^ISSUING   ORGANIZATIONS 

cent  of  the  total  number  of  wage  earners  employed  and 
83.2  per  cent  of  the  total  value  of  all  products. 

Nor  is  it  in  the  manufacturing  industries  alone  that  the 
corporation  is  dominant.  In  mining,  transportation  and 
public  utilities,  and  in  finance  it  enjoys  an  equally  eminent 
position.  This  is  well  shown  by  the  following  table  com- 
piled from  the  income  tax  returns  for  1917. 


Number  of  Corporations  in  Given  Industries  Compared  with 
Number  of  Individuals  Reporting  Income  from  these  In- 
dustries IN  1917  ^ 


Corporation  returns 

Individual 

Industries  in 
which  engaged 

Number 

showing 

profit 

Number 
showing 
no  profit 

Total 
number 

Percent 

.  by 

indus- 
tries 

returns 
Number 

Agriculture  and  re- 
lated industr's .... 

Mining  and 

quarrying 

Manufacturing 

Construction 

Transportation  and 
public  utilities .... 

Trade 

5,633 

6,371 

58,788 
7,073 

18,673 
72,947 

12,160 
49,165 

1,269 

4,027 

6,578 

20,854 

3,670 

7,769 
18,110 

6,434 
19,197 

32,708 

9,660 

12,949 
79,642 
10,743 

26,442 
91,057 

18,594 
68,362 

33,977 

2.7 

3.7 

22.7 

3.1 

7.5 
25.9 

5.3 
19.5 

9.6 

251,838 

1,882 
22,850 
12,791 

6,843 
134,862 

Personal  service 

and  professions .... 
Finance 

111,207 
3,065 

Inactive  and  not 
otherwise  defined . . 

Combination  of 
two  or  more 

33,450 
33,738 

Totals 

232,079 

119,347 

351,426 

100.0 

612,529 

2  Prepared  from  Statistics  of  Income  (1917)  compiled  by  the  Com- 
missioner of  Internal  Revenue,  U.  S.  Treasury  Department. 

Even  the  field  of  trade,  that  time-honored  precinct  of  the 
individual  merchant,  is  rapidly  succumbing  to  this  superior 
type   of   organization.     Only   in    agriculture   and   related 


USE    OF    THE    BUSINESS    CORPORATION     199 

industries  and  for  personal  service  and  the  professions  does 
it  appear  ill  suited.  There  are,  nevertheless,  many  large 
cattle  ranches  in  the  West,  and  dairying  undertakings  in 
the  East  operating  as  corporations.  It  is  used  but  spar- 
ingly for  personal  service  enterprises;  and  it  is  doubtful 
whether  it  can  make  much  headway  in  the  professions,  for 
some  of  the  states,  including  New  York,  bar  it  to  the 
latter  entirely. 

While  the  census  report,  referred  to  above,  ascribes  this 
rapid  growth  in  the  use  of  the  corporation  primarily  to 
the  advantages  that  it  affords  in  the  matter  of  procuring 
capital,  other  factors  also  have  stimulated  it.  These  are 
of  two  classes:  (1) Those  inherent  in  the  type  of  organiza- 
tion itself,  which  have  already  been  described  in  a  preceding 
chapter  under  advantages  of  the  corporate  form;  and  (2) 
external  influences  that  favor  it  in  one  way  or  another. 

These  external  forces  arise  for  the  most  part  out  of  the 
peculiarities  of  the  present  industrial  system.  Technical 
progress,  for  example,  has  made  large-scale  production  pos- 
sible by  introducing  machinery  and  factory  methods  into 
manufacture.  But  large  scale  production  without  an  avail- 
able market  and  a  source  of  raw  materials  is  of  itself  not 
practical.  It  does  not  become  a  factor  in  industrial  or- 
ganization until  the  means  of  communication  and  transpor- 
tation have  been  brought  into  technical  coordination,  so 
that  a  wide  market  for  finished  products  and  an  ample 
supply  of  raw  materials  may  be  reached.  Commercial  prac- 
tices and  aids  in  the  nature  of  finance,  extension  of  credit, 
etc.,  also  are  factors  influencing  the  growth  of  business 
establishments.  Big  establishments  then  are  the  outstand- 
ing characteristic  of  modern  industry,  and  since  big  estab- 
lishments require  large  accumulations  of  capital  they  adopt 
a  form  of  ownership  organization  that  can  meet  this  prime 
requirement  with  the  greatest  ease.  This  the  corporation 
does  admirably  and  with  a  mimimum  of  risk. 


200     SECURITIES-ISSUING    ORGANIZATIONS 

The  policies  adopted  by  the  several  states  with  regard 
to  incorporation  also,  have  by  no  means  been  negligible 
factors  in  promoting  its  more  general  use.  The  sale  by 
state  legislatures  of  special  charters  has  practically  ceased, 
but  there  still  exists  among  a  few  of  the  several  states  a 
sort  of  keen  competition  to  secure  the  charter-granting 
business  of  the  country,  which,  because  of  the  initial  fran- 
chise tax,  can  be  made  very  remunerative.  It  is  needless 
to  point  out  that  such  competition  is  conducted  on  the 
principle  of  giving  the  greatest  benefits  for  the  least  cost. 
Consecjuently,  these  states  encourage  incorporation  and 
stimulate  it  by  adopting  tax  laws  under  which  may  be  se- 
cured the  broadest  grant  of  powers  with  a  minimum  amount 
of  restriction,  control  and  onerous  obligations.  Some  of 
the  states  that  have  set  up  "  bargain  counters  "  over  which 
to  engage  in  the  business  of  charter  selling  are  New  Jersey, 
Delaware,  Maine  and  West  Virginia.  New  Jersey,  which 
until  1913,  had  been  called  the  home  of  American  monopo- 
lies, for  some  years  preceding  that  date  derived  about  60 
per  cent  of  its  annual  revenue  for  state  purposes  from  its 
corporation  franchise  tax  —  a  tax  which  was  no  heavier 
or  lighter  than  was  to  be  found  in  a  considerable  number  of 
states  but  which  was  gladly  paid  for  holding  company 
privileges  and  other  advantages.  The  other  three  states 
also  draw  a  substantial  proportion  of  their  funds  from  the 
same  source.  When,  in  1913,  New  Jersey  revamped  her 
corporation  laws  making  them  less  desirable  from  the 
standpoint  of  "  big  business,"  Delaware  became  its  heir. 
This  little  state,  with  a  population  of  but  a  few  hundred 
thousand,  during  a  single  month  —  July,  1920  —  granted 
charters  to  corporations  whose  aggregate  authorized  capital 
stock  reached  the  staggering  sum  of  $1,350,000,000  repre- 
senting 80  per  cent  of  the  nation's  total  for  that*  month. 

Even  the  Federal  Income  Tax  Law  of  1918  fosters  in- 
corporation by  placing  a  heavier  burden   of  taxes  upon 


USE    OF    THE    BUSINESS    CORPORATION     201 

other  forms  of  ownership.  Thus,  in  a  letter  to  the  Ways 
and  Means  Committee  of  the  House  of  Representatives  in 
Washington,  (March  1920)  Mr.  Houston,  the  Secretary  of 
the  Treasury  said:  "  In  1918  the  members  of  a  well-known 
partnership  paid  nearly  $1,125,000  more  taxes  than  they 
would  have  paid  had  their  business  been  organized  as  a 
corporation." 

So  long  as  the  corporation  remains  the  favored  type  of 
organization  for  big  business  these  influences  will  continue 
to  make  themselves  felt.  Big  business  demands  advan- 
tages that  the  personal  ownership  types  of  organization 
do  not  offer,  and  to  attain  them  it  will  not  hesitate  to  in- 
fluence legislation  to  secure  the  passage  of  laws  under 
which  it  may  most  effectively  carry  out  its  operations  and 
plans,  whether  these  may  or  may  not  be  for  the  best  in- 
terests of  the  public.  It  is  under  the  pressure  of  these  de- 
mands that  certain  clearly  defined  types  of  corporations 
have  been  given  the  statutory  sanction,  under  which  they 
have  been  molded  into  shape  by  the  exactions  of  economic 
conditions. 

Types  of  Corporations.  —  Viewed  from  the  standpoint 
of  its  structural  arrangements,  the  business  corporation 
exhibits  two  distinct  types:  (1)  the  simple  corporation;  and 
(2)  the  securities-holding  corporation. 

Where  a  corporation  is  authorized  to  carry  on  a  busi- 
ness undertaking,  but  is  not  specifically  granted  the  power 
to  hold  or  acquire  the  securities  of  other  corporations,  it 
is  a  simple  corporation.  Under  the  English  common  law 
all  business  corporations  are  of  this  type;  and  under  the 
statutes  of  most  of  the  several  states  it  is  still  considered 
to  be  the  ordinary  type.  While  this  does  not  preclude  the 
simple  corporation  from  establishing  certain  intercorporate 
relations,  such  as  interlocking  directorates  or  a  community 
of  interest,  it  does  preclude  all  arrangements  whereby  a 
relationship,  giving  to  one  corporation  a  claim  to  either 


202     SECURITIES-ISSUING   ORGANIZATIONS 

the  income  or  assets  of  another,  or  the  legal  control  over 
it,  may  be  created  through  the  use  of  securities,  particu- 
larly of  the  ownership  type. 

Such  corporations  draw  their  income  only  from  the  busi- 
ness plants  and  equipment,  the  legal  title  to  which  is 
vested  directly  in  them.  Consequently  they  must  operate 
this  economic  capital  directly,  in  the  same  way  as  an  in- 
dividual proprietor  operates  his  business  establishment. 
Nothing  may  stand  between  them  and  the  direct  control 
of  the  property  that  they  own.  It  follows,  therefore,  that 
they  form  the  organizations  that  are  originally  employed 
to  effect  the  conversion  of  economic  capital  into  securities 
that  thereupon  become  available  as  business  assets  for  the 
securities-holding  corporations. 

The  preceding  chapters  that  describe  the  corporate  form, 
its  securities,  formation,  and  internal  organization  refer 
primarily  to  the  simple  corporation.  It  is  more  numerous, 
by  far,  both  in  this  country  and  in  foreign  lands,  than 
is  the  other  type.  Numerically,  it  makes  up  the  great  bulk 
of  corporate  organizations.  But  in  so  far  as  prestige,  power 
and  influence  over  the  business  life  of  the  community  is 
concerned,  it  must  concede  the  premiership  to  the  securi- 
ties-holding type. 

The  Securities-Holding  Corporation.  —  The  securities- 
holding  corporation  —  or  "  holding  company  "  as  it  is  most 
conomonly  called  in  the  United  States  —  differs  from  the 
simple  corporation  only  in  that  it  is  empowered  by  statute 
or  charter  provision  to  purchase,  hold,  assign,  mortgage, 
pledge  or  otherwise  dispose  of  the  securities  of  other  cor- 
porations. It  may  thus  acquire  and  own,  either  ownership 
or  creditor  securities  or  both.  When  it  acquires  the  owner- 
ship type  of  securities  (stocks)  it  naturally  becomes  a 
stockholder,  and  under  most  holding  company  laws  in  this 
as  well  as  in  foreign  countries,  it  is  accorded  the  same 
rights  and  privileges  that  any  other  stockholder  may  pos- 
sess, including  the  right  to  vote. 


USE    OF   THE    BUSINESS    CORPORATION     203 

In  the  United  States  the  securities-holding  corporation 
first  made  its  appearance  as  early  as  1832,  when  the  Balti- 
more and  Ohio  Railroad  Company  was  authorized  by 
special  act  of  the  legislature  of  the  state  of  Maryland  to 
acquire  and  hold  the  shares  of  stock  of  the  Washington 
Branch  Road.  From  that  time  on  until  1888,  when  the  state 
of  New  Jersey  first  passed  a  general  holding  company  law, 
the  holding  power  was  sporadically  granted  by  a  number 
of  state  legislatures.  The  state  of  Pennsylvania,  for  ex- 
ample, by  several  acts  extending  over  the  period  from  1853 
to  1870  empowered  the  Pennsylvania  Railroad  Company 
to  acquire  the  stocks  of  other  roads.  This  railroad,  by 
judiciously  exercising  the  privilege,  succeeded  in  building 
up  the  extensive  network  of  railway  lines  that  is  now- 
known  as  the  Pennsylvania  System.  However,  it  was  not 
until  1897,  when  business  began  to  recover  from  the  effects 
of  the  disastrous  panic  of  1893  and  the  subsequent  years  of 
depression,  that  the  holding  company  came  into  general 
use.  Most  of  the  great  holding  companies  that  are  such 
a  prominent  feature  of  our  industrial  system  were  formed 
since  1900.  The  United  States  Steel  Corporation  with  a 
capital  stock  of  $1,100,000,000  was  formed  in  1901;  the 
American  Locomotive  Company  with  $50,000,000,  in  1901 ; 
the  American  Agricultural  Chemical  Company  with  $100,- 
000,000  capital  stock,  in  1899;  the  American  Can  Company 
with  $88,000,000  capital  stock,  in  1901;  the  old  American 
Tobacco  Company  with  $100,000,000  capital  stock,  in  1904; 
the  American  Smelting  and  Refining  Company,  in  1901, 
and  the  International  Mercantile  Marine  Company  with 
$120,000,000  capital  stock,  in  1902.  Indeed,  the  record  of 
holding  company  incorporations  made  in  the  year  1901  has 
thus  far  not  been  surpassed.  In  that  year,  in  the  month  of 
April  alone,  charters,  authorizing  the  issuance  of  stock 
to  the  amount  of  $1,619,000,000  were  recorded,  chiefly  in 
the  state  of  New  Jersey.  The  great  majority  of  these 
were  for  holding  companies. 


20i     SECURITIES-ISSUING   ORGANIZATIONS 

The  holding-company  clauses  that  are  to  be  found  m  the 
corporation  laws  of  a  number  of  the  states  today,  are  of 
two  general  types:  first,  those  that  grant  the  holding  power 
to  all  corporations  chartered  by  the  state,  regardless  of 
whether  it  may  or  may  not  have  been  requested ;  and  second, 
those  under  which  it  will  be  granted  only  upon  a  specific 
request,  and  upon  inclusion  of  a  provision  to  that  effect 
in  the  charter.  The  laws  of  the  states  of  New  Jersey,  Dela- 
ware, Maine  and  West  Virginia  represent  the  former  and 
those  of  New  York  the  latter. 

The  New  Jersey  law,  in  effect  prior  to  1913,  was  as 
follows:  ^  "Any  corporation  may  purchase,  hold,  sell,  as- 
sign, transfer,  mortgage,  pledge  or  otherwise  dispose  of  the 
shares  of  the  capital  stock  of,  or  any  bonds,  securities  or 
evidences  of  indebtedness  created  by  any  other  corporation 
of  this  or  any  other  state,  and  while  owner  of  such  stock 
may  exercise  all  the  rights,  powers  and  privileges  of  owner- 
ship, including  the  right  to  vote  thereon." 

In  1913  this  section  was  practically  repealed  but  was 
restored  in  substantially  its  original  form  in  1920.  It  is 
representative  of  similar  laws  in  other  states. 

Application  of  the  Securities-Holding  Principle. — 
Wliile  the  simple  corporation  effects  the  primary,  or  orig- 
inal, "  securitization  "  *  of  economic  capital,  that  includes 
within  the  concept  both  real  and  money  capital,  the  hold- 
ing corporation  institutes  a  secondary  "securitization"  of 
capital  in  its  widest  concept;  namely,  as  including  real 
economic  goods,  money  and  securities.  Because  of  this 
diversity  of  underlying  capital,  there  is  a  variety  of  uses 
to  which  the  securities-holding  principle,  as  embodied  in 
the  holding  company,  may  be  put.  In  the  first  place,  it 
may  be  employed  to  effect  a  subdivision  of  legal  title  of 
ownership  in  the  capital  of  a  business  corporation,  without 

s  General  Corporation  Law  of  New  Jersey,  No.  51. 
*  The  meaning;  of  the  word  "  securitization  "  has  been  fully  ex- 
plained on  page  97. 


USE    OF    THE    BUSINESS    CORPORATION     205 

disturbing  the  final  claim  on  either  the  income  accruing  to 
that  capital,  or  on  the  capital  itself,  as  assets.  This  we 
shall  call  simply  subdivision  of  legal  title.  In  the  second 
place,  it  may  be  used  for  the  purpose  of  substituting  the 
securities  of  the  holding  corporation  for  the  securities  of 
other  corporations,  in  the  hands  of  the  stockholders  of  the 
latter.  This  we  shall  refer  to  as  the  process  of  securities- 
substitution.  It  may  be  brought  about  out  of  a  desire  to 
participate  in  the  income  of  other  corporate  enterprises,  or 
because  of  special  problems  of  financing  that  are  best 
solved  through  the  medium  of  a  securities-holding  organi- 
zation. 

Subdivision  of  Legal  Title.  —  A  corporation  that  possesses 
the  stock  holding  privilege  frequently  finds  it  advantageous 
to  transfer  the  legal  title  to  a  part  of  its  business  capital 
to  another  corporation,  but  at  the  same  time,  while  so 
doing,  it  desires  to  retain  its  standing  claim  on  the  income, 
and  deferred  claim  on  the  assets  thus  transferred.  Its 
method  of  procedure  in  this  case  is  to  cause  a  new  corpo- 
ration to  be  created  and  to  transfer  to  it  the  capital  in 
question,  receiving  in  return  therefor  all  the  authorized 
capital  stock  of  the  new  corporation.  The  original  corpo- 
ration is  then  called  a  parent  company  and  its  child  a 
daughter  or  subsidiary.  It  is  quite  obvious  that  such  a 
procedure  need  not  affect  the  unity  of  purpose  of  the  two 
corporate  entities,  for  the  subsidiary  is  controlled  by  the 
directors  of  the  parent.  Neither  does  it  affect  the  claim 
on  income  or  assets  of  the  stockholders  of  the  parent  be- 
cause their  securities  remain  unchanged,  as  also  docs  the 
aggregate  of  assets  supporting  them.  Such  a  transaction 
cannot,  therefore,  be  called  a  true  substitution  of  securities. 

The  United  States  has  proved  a  very  fruitful  field  for 
this  use  of  the  holding  company.  The  large  number  of 
states,  each  a  sovereign  judicial  jurisdiction,  has  brought 
about  a  condition  such  that  a  corporation  frequently  finds 


206     SECURITIES-ISSUING    ORGANIZATIONS 

itself  at  a  considerable  disadvantage  in  doing  business  in 
a  state  other  than  that  of  incorporation.  In  order  to  over- 
come these  disadvantages  it  may  cause  a  subsidary  to  be 
created  in  the  state  in  question.  This  was  the  practice 
followed  by  the  old  Standard  Oil  Trust.  In  like  manner, 
subsidiaries  of  this  type  are  frequently  organized  to  take 
over  and  operate  the  foreign  branches  of  corporations. 
This  is  common  among  foreign  trade  concerns.  The  Gen- 
eral Motors  Corporation  conducts  its  Canadian  business 
under  the  General  Motors  Company  of  Canada,  Ltd.  and 
its  European  business  under  the  General  Motors  Com- 
pany, Ltd.,  organized  in  England.  There  are  in  the 
United  States  also  many  concerns  created  and  owned  by 
foreign  parent  companies.  In  all  such  cases  the  total 
authorized  capital  stock  of  the  subsidiary  is  usually  held 
by  the  parent  company. 

The  principle  of  subdivision  of  legal  title  is  also  fre- 
quently resorted  to  in  order  to  facilitate  the  operation 
and  administration  of  particular  divisions  of  the  business. 
For  instance,  the  United  States  Steel  Corporation,  in  1906, 
organized  the  Indiana  Steel  Company  to  erect  and  operate 
its  great  plant  at  Gary,  Indiana,  and  in  the  same  year 
the  Universal  Portland  Cement  Company  to  take  over 
its  cement  plants,  and  in  1917  the  Federal  Shipbuilding 
Company  to  take  over  the  shipbuilding  plant  erected  by 
the  American  Bridge  Company,  which  is  itself  a  unit  of 
the  Steel  Corporation.  The  General  Motors  Corporation 
has  in  like  manner  organized  the  McLaughlin  Motor  Car 
Company,  Ltd.  of  Canada,  the  General  Motors  Truck 
Company,  the  General  Motors  Acceptance  Corporation  and 
others.  E.  I.  du  Pont  de  Nemours  and  Company  similar^ 
organized  the  Du  Pont  Engineering  Company  with  a  capital 
of  $7,000,000  to  construct  a  nitrate  plant  for  the  govern- 
ment at  Nashville,  Tennessee,  and  also  the  E.  I.  du  Pont 
de  Nemours  Export  Company  to  carry  on  its  export  trade. 


USE    OF    THE    BUSINESS    CORPORATION     207 

Another  use  of  this  type  of  organization  by  manufac- 
turing corporations,  is  to  place  the  legal  title  of  properties 
characterized  by  the  wasting  nature  of  their  assets  under 
a  subsidiary.  Mining  and  lumbering  enterprises  fall  gen- 
erally into  this  class.  It  is  also  found  to  be  useful  where 
an  industrial  corporation  constructs  and  operates  public 
utilities  which,  in  most  of  the  states,  must  be  incorporated 
under  special  laws.  Housing  and  land  development  under- 
takings are  also  conducted  under  this  plan. 

The  practice  of  subdividing  the  legal  title  to  corporate 
property  is,  however,  very  susceptible  to  abuse  and  mis- 
use. The  extensive  use  of  the  so-called  "  bogus  independent 
concerns  "  by  many  of  our  large  predatory  corporations, 
is  an  illustration  of  this.  Most  of  these  schemes  have  been 
devised  to  circumvent  the  provisions  against  restraint  of 
competition,  of  the  Sherman  Anti-Trust  Law  and  others. 
Many  examples  might  be  cited  to  illustrate  this  particular 
use  of  subsidiaries,  but  a  few  must  suffice.  In  1897  the 
Electric  Lamp  Combine  is  reputed  to  have  organized  the 
Royal  Incandescent  Lamp  Company,  and  took  pains  to 
make  it  appear  to  be  an  independent  concern.  The  Ameri- 
can Tobacco  Company  in  1903  organized  the  Queen  City 
Tobacco  Company,  and  the  National  Cash  Register  Com- 
pany the  Universal  Cash  Register  Company  for  similar 
purposes. 

It  must  be  borne  in  mind  that  there  is  a  clear  distinc- 
tion between  this  type  of  subsidiary,  which  is  created  and 
owned  in  its  entirety  by  the  parent,  and  one  that  has  been 
acquired  through  purchase  of  stock  from  original  stock- 
holders. The  latter  may  be  accomplished  through  the 
medium  of  securities-substitution,  a  phenomenon  that  does 
not  occur  in  the  former  case  where  the  distribution  of  in- 
come is  effected  through  the  medium  of  the  outstanding 
securities  of  the  parent  company  which  remain  undisturbed 
by  the  procedure  of  subdivision  of  legal  title.     Of  course, 


208     SECURITIES-ISSUING   ORGANIZATIONS 

it  is  possible  for  the  parent  to  sell  a  part  of  the  securities 
of  its  subsidiary,  retaining  only  enough  to  insure  control, 
but  such  a  procedure  would  hardly  effect  a  substitution  of 
securities.  It  would  amount  simply  to  a  conversion  of 
stock  assets  into  cash  without  reducing  the  amount  of  se- 
curities of  the  parent  company  held  by  investors  who  are 
the  final  participants  in  its  income.  The  securities  of  the 
subsidiary  that  are  sold  to  investors  would  be  merely  an 
addition  to  the  sum-total  of  securities  through  which  in- 
come is  to  be  distributed  to  the  ultimate  recipients. 

Substitution  of  Securities.  —  But  how  different  from  the 
above  is  the  effect  produced  where  a  new  corporation  is 
formed  to  acquire  the  securities  of  other  corporations  and 
to  place  its  own  in  their  stead.  This  is  the  process  of 
securities-substitution.  The  concern  whose  stock  is  thus 
acquired  is  usually  called  a  subsidiary  of  the  holding 
company,  when  the  latter  has  a  controlling  interest  in  it, 
and  an  affiliated  company,  if  a  substantial,  but  minority, 
interest  is  held. 

The  simplest  case  of  securities-substitution  occurs  where 
a  holding  company  acquires  the  securities  of  a  single  sub- 
sidiary. Should  the  holding  company  possess  all  of  the  sub- 
sidiary's securities  and  issue  in  their  stead  a  like  amount 
of  securities  that  are  identical  in  all  respects,  the  substi- 
tution cannot  be  said  to  have  any  marked  effect  on  the 
distribution  of  income  or  control  over  business  capital, 
for  the  ultimate  supporting  capital  back  of  the  new  securi- 
ties would  be  that  which  was  back  of  the  old.  In  order  to 
bring  about  any  change  in  income  distribution  in  a  case 
such  as  this,  there  would  have  to  be  some  difference  be- 
tween the  two  securities.  For  example,  the  holding  com- 
pany might  substitute  a  limited  dividend,  non- voting  pre- 
ferred stock  in  place  of  most  of  the  common  stock  of  the  old 
company,  while  the  small  amount  of  its  common  stock  is 
held  by  the  promoters  for  purposes  of  control  or  enjoyment 


USE    OF    THE    BUSINESS    CORPORATION     209 

of  all  excess  profits.  This  might  conceivably  be  of  advan- 
tage to  the  promoters,  but  of  disadvantage  to  the  body  of 
stockholders  generally.  Indeed,  such  operations  as  these 
are  most  frequently  undertaken  for  purposes  of  financial 
manipulation  in  order  to  bring  about  an  artificial  rise  or 
decline  in  the  market  value  of  the  securities  to  the  profit 
of  the  promoters.  However,  this  is  usually  only  a  tem- 
porary expedient  that  results  finally  in  the  complete  dis- 
solution of  one  or  the  other  corporation. 

Because  of  the  great  number  of  concerns  frequently  in- 
volved, the  practice  of  securities-substitution,  as  employed 
in  modern  business,  presents  a  much  more  complex  problem 
than  that  above  outlined.  Where  two  or  more  subsidiaries 
are  involved  in  a  securities-substitution  operation,  the  in- 
evitable result  is  an  economic  combination  of  the  basic  or 
underlying  capital,  a  legal  combination  of  the  income  de- 
rived from  that  capital  and  a  possible  control  over  it. 

Consolidation  of  Corporations.  —  In  the  financial  world 
the  term  consolidation  is  used  to  signify  the  process  of 
bringing  a  number  of  existing  corporations,  or  their  business 
establishments  under  the  control  and  direction  of  a  single 
corporation.  It  may  be  effected  through  stock  ownership 
or  fusion.  In  the  former  case  the  controlled  units  retain 
their  legal  entity  as  corporations,  but  in  the  latter,  they  are 
dissolved  and  their  business  establishments  become  the 
direct  property  of  the  combination  unit.  Fusions  may  be 
made  either  through  merger  or  amalgamation,  a  process 
which  may  or  may  not  involve  the  substitution  of  securi- 
ties. 

A  merger  takes  place  when  one  ownership  organization 
absorbs  the  properties,  real  and  personal,  assets  and  busi- 
ness of  one  or  more  other  organizations  that  are  there- 
upon dissolved.  Thus,  if  of  the  three  companies  A,  B, 
and  C,  the  former,  Company  A,  should  acquire  by  merger 
the  properties  of  companies  B  and  C,  company  A  alone 


210     SECURITIES-ISSUING   ORGANIZATIONS 

would  retain  its  identity  while  the  other  two  would  dis- 
appear entirely.  The  absorption  of  the  Central  District 
Telephone  Company  by  the  Bell  Telephone  Company  of 
Pennsylvania  illustrates  this  principle.  The  latter  com- 
pany was  incorporated  in  1879  as  the  Bell  Telephone 
Company,  of  Philadelphia  and  its  name  changed  to  the 
present  title  in  1907.  In  1918  it  acquired  the  properties 
and  business  of  the  Central  District  Telephone  Company 
and  assumed  its  funded  debt  outstanding. 

An  amalgam.ation  occurs  where  a  new  organization  is 
formed  for  the  specific  purpose  of  taking  over  the  properties, 
assets  and  business  of  existing  units,  thereby  leaving  the 
newly  formed  unit  as  the  only  existing  entity.  Thus,  in 
1896,  the  New  York  Telephone  Company  was  incor- 
porated to  acquire  the  properties  and  business  of  the 
Metropolitan  Telephone  and  Telegraph  Company  and  the 
Westchester  Telephone  Company.  And  more  recently,  in 
1911,  the  Mountain  States  Telephone  &  Telegraph  Com^ 
pany  was  formed  to  absorb  the  Colorado  Telephone  Com- 
pany operated  in  Colorado  and  New  Mexico  and  the  Rocky 
Mountain  Bell  Telephone  Company  in  Utah,  Idaho,  Mon- 
tana and  Wyoming.  The  amalgamation  was  effected 
through  the  acquisition  by  the  new  company  of  the  stock  o{ 
each  of  the  constituent  companies,  and  with  the  transfer  to 
it  of  all  the  physical  properties,  franchises,  etc.,  of  the 
former  companies,  which  were  thereupon  dissolved. 

However,  in  practice  little  attempt  is  made  to  differen- 
tiate between  these  several  methods  of  consolidation,  and 
tho  terms  "  amalgamation,"  "  merger  "  and  "  consolidation  " 
are  frequently  used  interchangeably. 

Prior  to  the  general  adoption  of  the  holding  principle 
in  ownership  organization,  the  merger  and  amalgamation 
were  resorted  to  to  combine  existing  units  on  a  large 
scale  into  a  single  large  operating  organization.  Such  was 
the  method  employed  in  forming  the  old  United  States 


USE    OF    THE    BUSINESS    CORPORATION     211 

Leather  Company  in  1893  with  a  capitalization  of 
$120,000,000,  consisting  of  $60,000,000  common  and  $60,- 
000,000  preferred  stock.  The  old  United  States  Cordage 
Company,  the  National  Starch  Company  and  the  American 
Malting  Company  likewise  were  the  result  of  merger 
operations.  It  was  also  employed  in  the  formation  of  the 
Standard  Oil  Trust  of  1882. 

The  earlier  consolidations  were  usually  effected  without 
the  use  of  the  holding  company.  In  the  later  ones,  how- 
ever, the  process  has  frequently  begun  through  the  acquisi- 
tion of  a  small  amount  of  stock  by  the  absorbing  unit 
which,  by  gradually  increasing  its  stockholdings  soon  be- 
comes the  sole  stockholder  and  thereupon  votes  to  dissolve 
its  subsidiary.  This  practice  has  been  common  among  our 
industrials,  and  particularly  with  the  General  Electric 
Company.  This  company  at  the  time  of  its  formation  in 
1892  arose  out  of  an  amalgamation  of  the  Edison  General 
Electric  Company,  the  Thompson-Houston  Electric  Com- 
pany and  the  Thompson-Houston  International  Electric 
Company.  By  1902  the  General  Electric  Company  h^d 
acquired  all  of  the  capital  stock  of  the  Sprague  Electric 
Company,  and  a  year  later  of  the  Stanley  Electric  Manu- 
facturing Company  which  were  then  merged  with  it  and 
dissolved.  In  1912,  the  company  similarly  dissolved  the 
National  Electric  Lamp  Company  and  its  subsidiaries  and 
merged  their  properties  with  its  own. 

To  bring  about  a  consolidation  of  this  kind  requires 
either  an  outright  sale  of  the  business  and  its  properties 
to  the  absorbing  company,  or  the  possession  by  it  of  all  the 
outstanding  shares  of  stock  of  the  companies  that  it  desires 
to  consolidate.  These  conditions  militate  against  its  more 
general  use  in  this  country  and  tend  to  favor  combinations 
bound  together  by  means  of  holding  companies  that  own  a 
majority  of  the  stocks  of  their  subsidiaries.  But  in  Euro- 
pean countries,  especially  in  Germany,  it  is  still  the  favor- 


212     SECURITIES-ISSUING   ORGANIZATIONS 

ite  means  of  building  up  the  modern  great  business  units. 
Since  the  war  it  has  played  a  prominent  part  in  forming 
the  gigantic  combinations  that  have  sprung  up  in  the 
German  steel,  chemical  and  electrical  industries,  although 
the  holding  company  principle  seems,  also,  to  be  gaining 
favor. 

However,  further  explanation  and  description  of  special- 
ized uses  of  the  modern  corporation  would  lead  into  a 
discussion  of  securities-substitution  companies  and  com- 
bination organizations.  Before  going  into  these  subjects  it 
will  be  necessary  to  explain  the  voluntary  association  in 
the  form  of  trust,  as  a  type  of  ownership  organization. 


CHAPTER  XII 

THE  BUSINESS  TRUST 

General.  —  It  is  a  well  recognized  principle  of  common 
law  that  a  person  may  temporarily  vest  the  legal  title 
to  property  together  with  the  exclusive  right  of  its  manage- 
ment and  control  in  another  as  trustee,  reserving  for  him- 
self or  others  only  the  profits  or  benefits  that  may  accrue 
to  such  property  while  under  the  control  of  the  trustee. 
Such  an  act  creates  a  trust  estate.  The  principle  has  its 
origin  in  the  right  of  private  property  and  inheritance,  and 
in  its  simplest  form,  it  is  employed  as  an  instrument  of 
the  courts  to  preserve  property  conveyed,  as  by  will,  to 
minors  during  their  minority.  It  is  of  importance  in  this 
work  inasmuch  as  it  has  come  to  be  used  as  a  form  of 
organization  for  the  conduct  of  business  enterprises. 

Definition.  —  The  business  trust  may  be  defined  as  a 
business  estate  in  the  custody  of  a  trustee,  who  holds  the 
legal  title  thereto  with  the  beneficial  interest  in  others  who 
are  the  beneficiaries.  The  settlors,  or  creators,  of  a  trust 
embarked  in  business  may  be  the  sole  beneficiaries  where 
they  contract  with  each  other  as  to  how,  severally,  they 
may  acquire  that  status. 

Trusts  are  essentially  of  two  types,  active  and  simple. 
In  the  simple  or  "  dry  "  trust  the  title  to  the  property  is 
vested  in  a  trustee  for  the  benefit  of  another  without  stipu- 
lating or  prescribing  in  the  contract  the  nature  of  the 
trust,  but  leaving  this  matter  to  the  construction  of  law. 
In  the  active  trust,  the  founder  or  settlor  prescribes  in 
the  trust  agreement  the  conditions  under  which  the  trust 

213 


2U     SECURITIES-ISSUING   ORGANIZATIONS 

is  to  be  conducted,  leaving  to  the  court  of  equity  only  the 
duty  of  enforcing  the  terms  of  the  agreement  in  order 
that  the  purpose  for  which  the  trust  was  created  may  not 
be  frustrated.  It  is  the  active  trust  that  is  employed  for 
the  conduct  of  business. 

The  structural  elements  of  the  business  trust  may  now  be 
summarized  as  follows: 

1.  The  settlors  who  draw  up  the  agreement  making  a  trust 
estate  of  certain  business  property  and  defining  the  manner 
in  which  such  property  is  to  be  owned  and  managed  and 
what  disposition  shall  be  made  of  it 

2.  One  or  more  trustees  whom  the  settlors  vest  with  the 
legal  title  to  the  property  and  with  the  power  of  manage- 
ment and  control  over  it  subject  to  the  provisions  of  the 
trust  agreement 

3.  The  beneficiaries  who  are  defined  in  the  trust  agree- 
ment, who  possess  the  equitable  interest  in  the  trust  estate 
entitling  them  to  the  net  profits  accruing  to  it  and  who 
usually  have  the  power  to  fill  vacancies  on  the  board  of 
trustees. 

Formation.  —  As  seen  from  the  preceding  paragraph,  a 
trust  embarked  in  business  is  the  result  of  a  contractual 
agreement  between  the  settlors  and  the  trustees.  The  rules 
of  common  law,  in  general,  give  to  the  settlors  the  right  to 
place  property  in  trust  and  to  specify  the  conditions  that 
shall  govern  its  control  and  management.  Thus  the  in- 
strument creating  the  trust,  commonly  called  the  trust 
agreement,  is  to  this  form  of  business  organization  what 
the  charter  is  to  the  corporation,  or  the  articles  of  associa- 
tion to  the  joint  stock  company,  namely,  its  fundamental 
grant  of  rights  and  powers. 

Since  a  state  may  not  generally  limit  the  freedom  of 
contract  for  a  purpose  other  than  to  protect  the  public  health 
safety  or  morals,  it  follows  that  the  trust  agreement  may 
provide    for    practically    any    form    of    organization   that 


THE    BUSINESS    TRUST  215 

places  the  legal  title  in  the  trustees  and  reserves  the  bene- 
fits to  others.  Practically  the  only  limitation  placed  upon 
the  conditions  of  the  trust  agreement  is  with  reference  to 
permanence.  In  practically  all  states  the  rule  against  per- 
petuities is  applied  to  trust  estates.  There  are  no  laws 
prescribing  procedure,  or  limiting  the  number  of  settlors, 
trustees  or  beneficiaries.  In  fact,  as  great  a  latitude  exists 
in  the  matter  of  drafting  the  details  of  organization  for 
the  business  trust  as  obtains  in  the  ordinary  partnership. 

The  Trustees 

Of  the  three  elements  that  go  to  make  up  the  organiza- 
tion of  the  business  trust  —  settlors,  beneficiaries  and 
trustees  —  the  trustees  are  responsible  for  the  management 
and  direction  of  the  trust  estate,  the  settlors  merely  make 
the  contract  creating  the  trust  and  disposing  of  the  estate  at 
its  expiration,  while  the  beneficiaries  have  the  equitable 
interest  in  the  profits. 

Trustees  as  Managers.  —  The  power  of  management  and 
direction  of  the  trust  estate  vested  in  the  trustee  under  a  dry 
trust,  is  determined  by  common  law  rules.  These  rules  place 
upon  him  the  same  responsibility  as  would  apply  to  an  in- 
dividual, proprietor,  or  to  ordinary  general  partners  in 
cases  where  there  are  several  trustees.  It  thus  includes 
full  and  unlimited  liability  on  all  contracts  entered  into  on 
behalf  of  the  trust  estate  and  full  and  unrestricted  power 
of  management  and  control,  but  exercised  under  the  gen- 
eral supervision  of  a  court  of  equity  whose  duty  it  is  to 
see  to  it  that  the  purpose  of  the  trust  is  fulfilled.  The 
trustee  cannot  delegate  to  another  any  part  of  his  dis- 
cretionary power,  that  is,  his  responsibility  for  final  de- 
termination of  contractual  rights  and  duties.  He  may, 
assign  to  others,  however,  the  performance  of  purely  minis- 
terial duties,  but  is  always  responsible  for  their  acts  in  like 
manner  as  a  principal  is  responsible  for  the  acts  of  his 


210     SECURITIES-ISSUING   ORGANIZATIONS 

agent.  The  bar  against  the  delegation  of  discretionary- 
power  is  on  the  theory  that  the  trustee  is  not  an  agent, 
but  is  himself  a  principal  and  the  court,  therefore,  refuses 
to  recognize  the  responsibility  of  any  one  other  than  the 
trustee.  Where  there  are  two  or  more  trustees,  they  must 
act  jointly,  as  a  unit,  in  all  discretionary  matters. 

However,  these  general  rules  of  law,  that  are  applicable 
in  case  of  a  simple  or  dry  trust  may  be  considerably 
altered  in  active  trusts  by  the  introduction  of  specific  pro- 
visions into  the  trust  deed  or  agreement.  In  this  way  the 
trustees  may  be  authorized  to  delegate  general  managerial 
power  to  others ;  and  it  may  also  be  provided  that  a  desig- 
nated majority  of  the  trustees  shall  have  power  to  act  for 
and  bind  the  trust  estate.  However,  all  such  instruments 
will  be  strictly  interpreted  by  the  courts.  Thus,  where  a 
majority  is  authorized  to  govern,  it  is  ordinarily  held  that 
they  are  not  thereby  empowered  to  act  without  consulting 
the  others,  who  must  at  least  be  given  an  opportunity  to 
be  heard.  As  a  result  of  these  general  rules  a  high  degree 
of  cooperation,  such  as  might  obtain  in  a  well  ordered 
partnership,  is  essential  where  there  is  more  than  a  single 
trustee. 

Appointment  of  Trustees,  Removal,  Successors.  —  In  an 
active  trust  the  original  trustee,  or  trustees,  are  appointed 
by  naming  them  in  the  trust  agreement  to  which  they  be- 
come parties.  Other  than  the  natural  mimimum  limit  of 
one,  there  is  no  rule  prescribing  the  number  of  trustees 
that  may  be  appointed.  This  is  left  entirely  to  tho  settlors, 
who,  of  course,  should  bear  in  mind  the  impracticability  of 
a  large  number  in  view  of  the  requirement  for  joint  action. 

The  term  of  office  of  trustees  may  be  prescribed  by  the 
trust  deed,  but  it  cannot  extend  beyond  the  legal  life  term 
of  the  trust.  Where  trustees  are  several  in  number  it  is  a 
common  practice  to  classify  them.  For  example,  in  the 
old  Standard  Oil  Trust  nine  trustees  were  appointed  and 


THE    BUSINESS    TRUST  217 

the  term  of  office  was  fixed  at  three  years,  but  they  were  so 
grouped  that  three  were  to  be  elected  annually  by  the 
beneficiaries.  This  arrangement  for  the  selection  of  suc- 
cessors of  trustees  is  common  with  many  business  trusts, 
each  beneficiary  being  accorded  a  number  of  votes  com- 
mensurate with  his  share  of  the  beneficial  interest  in  the 
trust.  If  no  specific  provisions  are  made  for  the  appoint- 
ment of  trustees'  successors  that  power  lies  exclusively 
with  the  court  of  equity. 

Since  the  trustees  are  themselves  principals  and  not 
agents  of  the  settlors  or  the  beneficiaries  it  follows  that  the 
latter  ordinarily  do  not  possess  the  power  of  removal  of 
trustees.  But  any  one  of  the  beneficiaries  or  trustees  may 
appeal  to  the  court  which  will  remove  the  accused  trustee 
when  sufficient  cause  for  removal  has  been  shown.  It  has 
also  been  held  valid  for  the  beneficiaries  and  one  trustee, 
acting  together,  to  remove  another  trustee  for  sufficient 
cause  where  provision  for  this  was  made  in  the  trust  deed. 

It  is  thus  fairly  well  established  that  the  creators  of 
the  trust  may  stipulate  in  the  trust  agreement  how  trustees 
and  their  successors  are  to  be  appointed  and  removed,  and 
that  an  arrangement  similar  to  that  used  in  the  election 
and  removal  of  directors  of  a  corporation  may  be  em- 
ployed. 

Liability  of  Trustees.  —  The  nature  of  trusteeship  places 
upon  the  trustees  a  two-sided  liability,  namely,  toward  the 
creditors  of  the  trust  and  toward  the  beneficiaries. 

Toward  the  creditors  the  trustee's  liability,  in  the  case 
of  the  simple  or  dry  trust,  is  unlimited.  Where  there  is 
but  one  trustee,  his  liability  is  identical  to  that  of  an  in- 
dividual proprietor,  and  where  there  are  several,  they  are 
treated  in  this  matter  like  ordinary  partners.  The  credi- 
tors look  to  the  trustee  personally  to  satisfy  their  claims, 
but  the  latter  may  reimburse  himself  out  of  the  trust  estate 
for  all  legitimate  losses.    If  the  trust  estate  is  insufficient  to 


218     SECURITIES-ISSUING   ORGANIZATIONS 

repay  him  fully  for  the  sums  paid  to  creditors,  the  balance 
remains  as  a  personal  loss,  for  it  cannot  be  passed  on  to 
the  beneficiaries.  It  is  customary  for  trustees  of  dry  trusts 
to  stipulate  in  all  business  contracts  entered  into  on  behalf 
of  the  trust,  that  the  trust  estate  alone  shall  be  bound  as 
pledge  for  the  debt,  and  in  this  way  to  relieve  themselves 
somewhat  from  the  onerous  burden  of  unlimited  liability. 

The  rule  concerning  trustees'  liability  in  active  trusts 
follows  that  described  as  applicable  to  a  dry  trust  in  all 
cases  where  the  trust  agreement,  or  deed,  does  not  defi- 
nitely and  specifically  limit  it.  Where  the  trust  is  em- 
barked in  business,  the  liability  of  the  trustee  is  frequently 
limited  by  the  deed  of  trust,  so  that  the  trust  estate  only 
is  bound  for  any  debts  incurred  on  behalf  of  the  trust. 
When  this  is  done  the  trustee  is  usually  required  to  show 
how  much  of  the  trust  property  is  encumbered,  and  what 
portion  is  free.  Then,  by  inserting  in  all  contracts  that  the 
trust  estate  alone  is  to  be  looked  to  for  satisfaction  of 
creditors,  he  cannot  himself  be  personally  liable,  except 
in  case  of  fraudulent  concealment  of  the  true  condition  of 
the  estate. 

The  trustee's  liability  toward  the  beneficiaries  arises  out 
of  the  circumstance  that  he  is  in  a  fiduciary  relation  to 
them.  For  in  spite  of  the  fact  that  the  legal  title  to  the 
trust  property  is  vested  in  him,  he  is,  nevertheless,  still 
liable  to  the  beneficiaries  for  any  losses  suffered  by  the 
trust  estate  as  a  result  of  his  culpable  negligence  or  fraudu- 
lent action,  because  such  acts  may  directly  damage  the 
beneficiaries  by  reducing  the  benefits  to  which  they  hold 
the  equitable  title.  Thus,  where  the  trust  estate  has  suf- 
fered loss  under  these  conditions,  the  trustee  is  personally 
liable  and  will  be  required  by  a  court  of  equity  to  reim- 
burse the  estate. 

Where  there  are  several  trustees  all  are  held  to  be  jointly 
liable  for  the  valid  acts  of  any  one  of  their  number.    This 


THE    BUSINESS    TRUST  219 

is  on  the  theory  that  there  is  no  such  thing  as  an  inactive 
trustee.  Conseciuently,  it  makes  little  difference  whether 
or  not  all  had  knowledge  of  and  gave  assent  to  the  bind- 
ing acts,  they  are  nevertheless  liable.  The  same  rule  has 
been  held  to  apply  with  equal  force  where  fraudulent  or 
culpable  acts  had  been  committed  by  one  trustee  to  whom 
the  others  had  left  the  direction  and  management  of  the 
trust's  affairs.  The  trustees  may,  however,  protect  them- 
selves by  active  participation  in  the  trusteeship  and  through 
voicing  a  negative  vote  in  such  matters. 

Right  to  Sue  and  be  Sued.  —  An  action  at  law  by  or 
against  a  trust  embarked  in  business  ordinarily  must  be 
brought  by  or  against  the  trustees.  The  beneficiaries 
usually  need  not  be  brought  into  the  action,  where  a  per- 
sonal judgment  is  sought  against  a  trustee  or  by  him  on 
behalf  of  the  trust,  although  in  a  few  states  by  a  limited 
number  of  cases,  it  has  been  held  that  the  beneficiaries 
should  be  joined  with  the  trustees  in  the  suit.  This  con- 
tention is  strengthened  where  the  very  existence  of  the 
trust  is  at  stake.  It  should  be  noted,  however,  that,  in  a 
business  trust  where  the  beneficiaries  gain  their  status  by 
virtue  of  ownership  of  transferable  shares,  there  are  serious 
practical  difficulties  standing  in  the  way  of  joining  them  in 
actions.  The  rule  in  these  cases  seems  to  favor  omitting 
them. 

The  judicial  jurisdiction  in  which  suit  may  be  brought 
is  also  of  importance  at  this  point.  In  statutory  trusts,  or 
such  as  are  created  by  court  appointments,  it  is  held  that 
action  must  be  brouglit  within  the  jurisdiction  of  the  super- 
vising court.  In  the  case  of  contractual  trusts,  such  as 
business  trusts  are,  the  trustee  if  he  is  a  citizen  may  sue 
and  be  sued  as  any  other  citizen  in  whatever  court's  juris- 
diction he  may  happen  to  be. 

The  general  character  of  the  liability  assumed  by  the 
trustee  is  such  that  he  can  easily  protect  himself  against 


220     SECURITIES-ISSUING   ORGANIZATIONS 

loss  arising  from  liability  for  any  lawful  act  on  his  part. 
Every  form  of  insurance  is  open  to  him,  and  he  is  a  stupid 
trustee  who  does  not  protect  himself  by  taking  out  fire, 
cyclone,  indemnity,  fidelitj^  and  like  types  of  insurance. 
For  culpable  and  fraudulent  acts  there  is,  of  course,  no 
protection ;  the  law  will  take  its  course  and  fix  liability  upon 
him  for  such  acts. 

Relation  to  Court  of  Equity.  —  A  trust  estate  is  con- 
stantly under  the  supervision  of  a  court  of  equity  with 
which  the  final  power  of  direction  rests.  While  the  trustee 
may  do  any  lawful  act  generally  authorized  by  the  trust 
agreement,  this  rule  is  not  construed  to  restrict  his  sphere 
of  action  to  such  things  as  he  may  have  been  specifically 
authorized  to  do.  If  an  act  not  specifically  authorized  but 
necessary  to  preserve  or  make  the  trust  effective,  is  con- 
templated by  the  trustee  he  may  apply  to  the  court  of 
equity  for  direction.  This,  when  given,  constitutes  full 
authority,  regardless  of  what  may  be  its  results.  But  of 
course,  this  does  not  mean  that  the  trustee  may  appeal  to 
the  court  to  decide  every  point  that  may  come  up.  It 
must  be  a  matter  of  some  importance. 

Compensation  of  Trustees.  —  The  trustee  is  entitled  to 
receive  any  compensation  that  may  be  agreed  upon  in  the 
trust  deed.  But  where  no  agreement  concerning  compensa- 
tion has  been  made  it  is  held,  according  to  the  American 
rule,  that  the  trustee  shall  be  entitled  to  a  reasonable 
compensation  for  his  services.  The  court  may  also  set 
the  amount  at  a  sum  that  will  make  it  possible  to  secure 
some  person  to  act  as  trustee  who  is  qualified  to  fill  that 
position  and  to  give  effectiveness  to  the  trust. 

The  Beneficiaries 

The  beneficiaries  are  the  entrepreneurs  of  the  trust 
estate.  They  are  said  to  have  the  equitable  title  while 
the  legal  title  to  the  property  is  vested  in  the  trustee. 


THE    BUSINESS    TRUST  221 

Their  status  is  very  like  that  of  partners  without  any  lia- 
bility or  power  of  management  and  direction.  Their 
entrepreneurial  function  is  something  less  than  even  that 
of  the  dormant  partner.  In  fact,  the  sole  entrepreneurial 
elements  to  be  found  in  their  status  are  a  standing  claim 
to  that  part  of  the  income  of  the  trust  not  otherwise 
claimed  by  creditors  and  sometimes,  though  not  always,  a 
deferred  claim  to  share  in  the  distribution  of  assets  upon 
dissolution  of  the  trust  after  preferred  claimants  have  been 
satisfied.  Since  their  claims  are  last  claims,  they  have 
assumed  at  least  a  large  share  of  the  element  of  risk,  which, 
coupled  with  the  power  to  appoint  and  remove  trustees 
and  to  terminate  the  trust,  frequently  given  them  in  the 
trust  deed,  would  seem  to  entitle  them  to  be  considered  as 
entrepreneurs. 

In  the  business  trust,  the  interests  of  the  beneficiaries 
are  usually  embodied  in  securities,  called  trust  certificates. 
This  feature,  combined  with  the  rights  and  powers  ordinarily 
given  to  the  beneficiaries  by  the  trust  agreement,  places  them 
in  a  position  with  relation  to  the  trust  which  is  very  similar 
to  that  of  the  stockholders  to  the  corporation. 

Rights  and- Powers  of  Beneficiaries.  —  The  rights  and 
powers  of  the  beneficiaries  are  fairly  well  defined  under 
common  law  practice  as  interpreted  by  court  decisions. 
Within  these  absolute  limits  they  may  be  modified  by  pro- 
visions inserted  into  the  deed  of  trust  by  virtue  of  which 
the  beneficiaries  gain  that  status.  They  will  be  considered 
here  only  in  so  far  as  they  apply  to  trusts  created  to  carry 
on  a  business. 

1.  Each  beneficiary  has  the  right  to  demand  and  receive 
his  proportionate  share  of  the  benefits  or  profits  accruing 
to  the  trust  estate  as  provided  in  the  deed  of  trust.  He 
can  dispose  of  his  share  as  he  pleases  after  once  having  re- 
ceived it.  There  are  also  cases  on  record  which  seem  to 
sanction  his  right  to  anticipate  his  income  from  the  trust 


222     SECURITIES-ISSUING   ORGANIZATIONS 

and  to  pledge  it;  but  usually  this  cannot  be  done  irrev- 
ocably. Where  all  of  the  beneficiaries  agree  that  the  ac- 
crued profits  shall  be  reinvested  they  may  thus  add  to 
the  trust  capital.  As  a  general  rule,  the  beneficiary  takes 
the  full  legal  title  to  the  accrued  income  at  the  moment  that 
it  should  be  paid  over  to  him,  because  beyond  that  time 
there  would  be  a  wrongful  withholding  by  the  trustee. 

2.  He  has  also  the  right  to  demand  reimbursement  to  the 
trust  estate  for  any  losses  thereto  arising  out  of  fraudulent, 
culpable  or  wrongful  acts  of  any  trustee.  Thus,  if  any 
loss  is  sustained  by  the  trust  estate  by  any  wrongful  or 
unlawful  act  of  a  trustee,  such  trustee  may  be  sued  in  a 
court  of  equity  and  judgment  secured  by  the  beneficiary 
requiring  the  culpable  trustee  to  restore  the  trust  estate. 

3.  He  has  the  right  at  all  times  to  be  informed  concern- 
ing the  management  and  the  condition  of  the  trust.  He  may 
demand  of  the  trustees  a  complete  statement  of  the  ac- 
counts and  finances  of  the  business  at  all  reasonable  times. 
This  right  is  usually  set  forth  in  the  trust  agreement  by 
requiring  the  trustees  to  render  periodic  statements  and 
reports  on  the  condition  of  the  trust  and  to  transmit  copies 
to  each  of  the  beneficiaries. 

4.  He  has  the  right  to  claim  non-liability  for  any  acts 
of  the  trustees.  The  creditors  cannot  look  to  him  for  the 
satisfaction  of  any  claims  not  fully  met  out  of  the  trust 
estate. 

5.  He  has  the  right  to  appeal  to  a  court  of  equity  to 
have  an  incompetent  trustee  removed.  In  such  an  action 
he  may  act  without  joining  in  with  the  other  beneficiaries. 
Removal  of  a  trustee  through  such  action  will  be  ordered 
by  the  court  only  where  the  beneficiary  presents  evidence 
showing  the  existence  of  sufficient  cause. 

6.  The  beneficiaries  as  a  body  may  reserve  to  themselves 
the  right  to  elect  successors  of  trustees  and  to  remove 
trustees  for  cause  where  it  is  so  provided  in  the  trust  agree- 


THE    BUSINESS    TRUST  223 

ment.  In  such  cases  the  method  of  voting  to  be  employed 
is  prescribed  in  the  agreement.  Where  the  beneficiary's 
interest  is  represented  by  transferable  trust  shares,  or 
certificates,  he  usually  has  one  vote  for  each  share  owned. 

7.  In  the  ordinary  type  of  business  trust,  wherein  the 
interest  of  the  beneficiary  is  represented  by  transferable 
shares,  it  is  common  to  insert  in  the  trust  agreement  that 
the  trust  may  be  terminated  at  any  time  through  the  ac- 
quiescence of  a  specified  majority  of  shareholders.  How- 
ever, where  such  provision  is  not  incorporated  in  the  trust 
deed,  the  beneficiaries  would  not  possess  power  to  terminate 
the  trust. 

Liability  of  Beneficiaries.  —  The  liability  of  loss,  or 
business  risk,  assumed  by  the  beneficiary  of  a  business 
trust  has  an  absolute  limit.  He  may  lose  only  what  he 
has  contributed  to  the  trust  estate  either  as  an  original 
settlement,  or  as  subsequent  additions  to  the  trust  estate 
through  new  contributions  or  conversion  of  profits.  Of 
course,  where  he  is  not  himself  a  settlor,  but  simply  a 
gratuitous  beneficiary,  he  assumes  no  risk  of  loss  of  any 
capital  that  he  may  have  had  at  the  time  of  the  creation 
of  the  trust.  The  right  of  creditors  to  satisfy  their  claims 
out  of  the  trust  estate  and  the  personal  estate  of  the  trustee 
does  not  usually  involve  the  beneficiary.  His  liability  is 
even  less  than  that  of  the  stockholder  in  a  corporation,  who, 
if  he  pays  less  than  the  par  value  of  stock,  may  be  called 
upon  by  creditors  in  case  of  insolvency  to  make  up  the 
difference  between  what  he  has  actually  paid  and  the  par 
value  of  the  shares  that  he  subscribed  to.  In  the  business 
trust,  on  the  other  hand,  he  risks  only  what  the  trustee 
has  actually  received  from  him,  and  not  what  he  may  have 
agreed  to  contribute. 

Transferability  of  Beneficial  Interest.  —  The  beneficiary 
of  the  business  trust  generally  has  the  same  privilege  of 
divesting  himself  of  his  equitable  interest  in  the  trust  estate 


224     SECURITIES-ISSUING   ORGANIZATIONS 

as  has  a  stockholder  in  a  corporation  to  sell  or  give  away 
his  interest  in  the  corporation.  But  this  privilege  may  be 
limited  by  a  trust  agreement  or  deed  to  be  exercisable  only 
after  the  beneficiary  has  received  his  profits,  and  so  may 
not  allow  him  to  divest  himself  of  the  title  to  the  benefits. 
An  arrangement  such  as  the  latter  would  obviously  inter- 
fere with  the  freedom  with  which  he  may  deal  with  his 
equitable  business  property.  However,  this  is  a  rare  excep- 
tion to  the  general  rule. 

The  usual  medium  employed  to  make  the  beneficial 
interest  in  a  trust  freely  transferable  are  securities. 
These  securities,  called  trust  shares  or  certificates,  carry 
with  them  a  standing  claim  on  the  net  income  of  the  trust 
and  a  deferred  claim  on  the  assets  of  the  trust  estate. 
They  ordinarily  have  no  face  or  par  value,  and  resemble 
very  closely  non-par  value  stock.  The  assignment  of  a 
nominal  par  value  to  them  is  not  prohibited,  but  as  it  is 
practically  meaningless,  it  can  serve  no  purpose  other 
than  that  of  being  a  convenient  basis  upon  which  to  dis- 
tribute the  earnings.  Special  preferences  may  be  repre- 
sented by  preferred  shares,  similar  to  those  of  the 
corporation.  In  fact,  all  of  the  niceties  of  participation 
adjustments  to  be  found  in  corporate  securities  may  be 
freely  employed  in  the  trust. 

The  Trust  Capital 

The  original  capital  of  a  trust  embarked  in  business 
consists  of  the  property,  real  and  personal,  that  the  settlors 
actually  conveyed  to  the  trustee.  The  divestment  by  the 
settlors  of  the  legal  title  to  the  property  must  be  absolute 
so  long  as  the  trust  is  to  lust.  They  may  in  no  way  retain 
control  over  it  while  it  remains  a  trust  estate.  The  trustee, 
as  before  stated,  has  the  legal  title  to  this  capital  and  the 
absolute  control  of  it.    Thus  he  may  deal  with  it  in  what- 


THE    BUSINESS    TRUST  225 

ever  manner  he  believes  will  best  accomplish  the  purpose 
for  which  the  trust  was  created,  being  limited  in  this  only 
by  such  specific  stipulations  as  may  be  found  in  the  deed 
of  trust. 

It  is  not  necessary  that  the  capital  be  preserved  in  the 
form  in  which  it  originally  was  when  the  trustee  received 
it.  In  a  trading  trust  created  to  derive  a  profit  from  the 
purchase  and  sale  of  commodities  this  is  self-evident.  The 
New  England  real  estate  trusts  are  also  usually  empowered 
to  buy,  hold  and  sell  parcels  of  real  estate.  In  fact,  it  is 
not  uncommon  to  authorize  trustees  of  business  trusts  to 
convert  the  properties  into  cash  for  reinvestment  in  other 
enterprises.  Hence,  capital  devoted  to  business  under- 
takings under  the  trust  form  of  ownership  organization 
need  be  no  less  fluid  than  under  any  other  type  of  or- 
ganization. 

The  trust  capital  is  not  capitalized  in  the  same  sense  as 
that  of  the  corporation.  In  the  latter  type  of  organization, 
as  we  have  seen,  the  capitalization  is  measured  by  the  sum 
total  of  outstanding  securities,  where  these  have  an  as- 
cribed par  value,  and  if  the  assets  do  not  equal  this  in  value 
the  items  in  the  balance  sheet  must  in  some  way  be  inflated 
to  bring  about  a  balance.  However,  in  the  trust,  the  capi- 
talization would  conform  more  closely  to  a  figure  arrived 
at  by  capitalizing  the  net  income  or  earning  capacity,  as 
no  authorized  capital  need  be  taken  into  account.  Even 
where  a  par  value  is  ascribed  to  the  trust  securities,  this 
is  a  meaningless  fiction;  for  the  creditors  as  well  as  the 
beneficiaries  may  demand  of  the  trustee  a  statement  show- 
ing the  actual  condition  of  the  trust  estate.  Any  error 
in  such  a  statement  arising  from  intent  or  undue  negligence 
on  the  part  of  the  latter  renders  him  personally  liable  for 
losses  sustained  by  others  acting  in  full  faith  upon  its 
correctness.  The  trust  estate,  where  such  power  is  given 
in  the  deed  of  trust,  may  be  pledged  as  security  for  issues 


226     SECURITIES-ISSUING   ORGANIZATIONS 

of  bonds  of  both  the  mortgage  and  debenture  tj^pes  almost 
as  freely  as  in  the  case  of  corporations,  with  similar  rights 
to  the  bondholders. 

Rights  of  Creditors 

The  creditors  of  a  trust  have  no  direct  rights  enforceable 
against  the  beneficiaries  although  they  may  acquire  title 
to  the  latter's  equitable  right  to  the  benefits.  However, 
this,  as  well  as  their  other  rights,  are  more  directly  against 
the  trustee  and  the  trust  estate.  These  rig]its  are  greatest 
in  the  simple  or  dry  trust.  They  may  be  summarized  as 
follows:  (1)  They  have  the  right  to  seek  satisfaction  out 
of  the  personal  estate  of  the  trustee  which,  of  course,  legally 
includes  the  trust  property,  and  they  may  sue  the  trustee 
in  person  to  recover,  leaving  it  to  the  latter  to  reimburse 
himself  out  of  the  trust  estate.  (2)  Unless  otherwise  pro- 
vided, a  creditor  also  has  the  right  to  demand  proof  that 
the  property  sold  to  the  trustee  has  actually  been  applied 
by  the  latter  to  the  purposes  of  the  trust.  (3)  In  case  of 
insolvency  of  the  trust  the  creditors  may  take  the  place  of 
the  beneficiaries  or  share  with  them  in  the  benefits  of  the 
trust  while  the  property  remains  in  the  hands  of  the 
trustee,  who  thus  becomes  trustee  for  the  creditors.  (4) 
They  may  appeal  to  the  court  of  equity  that  has  jurisdic- 
tion over  the  trust  to  have  the  assets  liquidated  and  the 
proceeds  turned  over  to  them ;  in  which  case  they  all  share 
ratably,  since  no  preference  may  be  granted. 

The  general  rights  of  creditors  as  above  outlined  are 
broadest  in  the  simple  or  dry  trust,  but  most  of  them  may 
be  considerably  narrowed  by  provisions  inserted  into  the 
trust  deed.  This  practice  is  commonly  followed  in  agree- 
ments creating  business  trusts.  For  instance,  the  first  right 
mentioned  is  usually  so  limited  that  the  trustee  pledges  only 
the  trust  property  to  support  creditors'  claims;  the  second 
may  be  entirely  eliminated;  but  the  others  ordinarily  hold. 


THE    BUSINESS    TRUST  227 

Other  Trust  Features 

Duration.  —  It  is  a  cardinal  principle  of  common  law 

that  no  property  shall  permanently  be  withdrawn  from 
commerce.  It  is  called  the  rule  against  perpetuities,  and 
is  interpreted  by  courts  to  mean  that  no  person  may,  ex- 
cept by  express  authority  of  statute,  suspend  his  power  of 
alienation  over  his  property.  The  application  of  this  prin- 
ciple to  trusts  has  been  clearly  stated  by  a  New  York  court 
which  said:  "The  mere  creation  of  a  trust  does  not,  ipso 
facto,  suspend  the  power  of  alienation.  It  is  only  sus- 
pended by  such  a  trust,  where  a  trust  term  is  created^ 
either  expressly  or  by  implication,  during  the  existence  of 
which  a  sale  by  the  trustee  would  be  in  contravention  of 
the  trust."  ^  But  this  is  further  modified  in  that  "  It  is 
only  in  cases  where  other  parties  besides  the  person  creat- 
ing the  trust  have  an  interest  therein  that  the  trust  be- 
comes irrevocable."  ^ 

This  rule  has  a  direct  bearing  upon  the  duration  or  term 
of  years  for  which  a  trust  may  be  created  without  vesting 
the  power  of  alienation  in  the  trustee.  Such  limitations  are 
fixed  by  statute  in  many  of  the  states,  but  vary  con- 
siderably. Thus,  in  some  jurisdictions,  the  term  of  lawful 
suspension  is  measured  by  a  life  or  lives  in  being,  in  others 
by  twenty  or  twenty-one  years,  and  in  still  others  by  the 
two  combined.  However,  it  should  be  pointed  out  that 
there  is  no  suspension  of  alienation  where  the  settlors  are 
the  sole  beneficiaries,  and  also  where  the  trustee  is  given 
the  power  to  sell  the  trust  property  with  direction  to  re- 
invest it.  Hence,  in  the  first  case,  the  life  term  of  the 
trust  would  be  limited,  while  in  the  latter  it  may  continue 
indefinitely. 

1  Roberts  v.  Corning  (1882),  89  N.  Y.  225. 

^  John  H.  Sears,  Triist  Estates  as  Business  Companies,  p.  131. 


228     SECURITIES-ISSUING   ORGANIZATIONS 

Scope  of  Activity.  —  The  business  trust  is  a  common 
law  organization  constituted  by  contractual  agreement. 
Consequently  it  is  not  restricted  in  the  scope  of  its  ac- 
tivities, except  where  it  may  be  against  public  policy  or 
statutes.  It  may  be  employed  to  conduct  any  kind  of 
business  enterprise  and  may  change  from  one  enterprise 
to  another  where  provision  for  this  is  made  in  the  agree- 
ment instituting  it.  In  this  respect,  therefore,  it  resembles 
the  personal  ownership  types  such  as  the  partnership,  as 
well  as  the  corporation;  for,  where  the  settlors  are  the 
sole  beneficiaries,  the  deed  may  be  changed  by  agreement, 
but  where  others  than  settlors  have  secured  rights  under 
it,  the  terms  of  the  deed  bind. 

Taxation.  —  It  is  a  generally  established  principle  of 
law  that  the  legal  and  equitable  interest  in  the  trust  shall 
not  both  be  taxed.  Taxes  must  be  levied  against  either 
the  one  or  the  other.  In  most  of  the  states  the  statutes 
provide  that  the  tax  against  the  trust  property  shall  be 
levied  against  the  trustee.  Where  there  are  several  trustees 
residing  in  different  jurisdictions  the  usually  accepted  rule 
is  that  the  real  property  shall  be  taxed  in  the  jurisdiction  in 
which  it  is  located  and  the  personal  property  in  the  juris- 
dictions in  which  the  trustees  reside.  In  order  to  avoid 
double  taxation  of  personalty  under  this  rule,  the  tax  is 
ordinarily  pro-rated  among  trustees  residing  in  different 
tax  jurisdictions.  Thus,  it  is  seen  that  the  beneficiaries  and 
the  trustees  may  not  both  be  taxed,  a  principle  that  gives 
the  trust  quite  an  advantage  over  the  corporation.  The 
latter  is  itself  taxed  on  its  franchise  as  well  as  on  its 
property  and  income,  and  its  stockholder  is  also  taxed  on 
his  stock. 

Dissolution.  —  The  trust  may  ordinarily  be  dissolved 
by  accomplishment  of  its  purpose,  by  expiration  of  its 
term,  by  volition  and  by  decree  of  the  court  of  equity.  The 
first  two   of   these   causes   need   no   further   explanation. 


THE    BUSINESS    TRUST  229 

Voluntary  dissolution  of  a  trust  can  be  effected  only  by 
agreement  of  the  parties  thereto  or  as  provided  in  the 
agreement  creating  it.  Where  the  settlors  are  the  sole 
beneficiaries  they  are  empowered  to  dissolve  it  at  will; 
but  where  third  parties  have  secured  rights  by  virtue  of 
it,  their  consent  would  be  necessary.  Where  the  purpose 
of  the  trust  is  injurious  to  the  public  welfare,  the  court 
may  cause  its  dissolution  by  so  decreeing.  Bankruptcy  is 
not  a  cause  for  dissolution.  A  trust  of  itself  cannot  become 
a  bankrupt.  The  usual  procedure  in  case  of  insolvency  is 
for  the  creditors  to  become  beneficiaries  and  as  such  to 
petition  the  court  to  dissolve  the  trust  and  to  apportion  its 
assets  among  them. 

Business  Uses  and  Types 

The  trust  is  without  doubt  the  most  versatile  of  all  types 
of  ownership  organization  in  business.  In  it  may  be  com- 
bined all  of  the  best  features  of  the  personal  ownership 
and  the  securities-issuing  forms.  Thus,  persons  engaged 
in  business  under  a  trust  have  the  advantage  of  the  mini- 
mum of  restriction  to  be  found  under  common  law  to  the 
same  degree  as  partners;  they  have  the  limited  liability 
of  stockholders  in  a  corporation,  and  their  enterprise  may 
have  the  same  flexibility  as  the  corporation  through  the 
use  of  securities  to  represent  the  claims  on  income  and 
assets.  Hence,  in  its  most  highly  developed  form  the  busi- 
ness trust  is  essentially  a  securities-issuing  type  of  organi- 
zation. As  such  it  is  adaptable  to  business  undertakings 
of  the  largest  kind  as  is  well  illustrated  by  the  famous 
Standard  Oil  and  American  Sugar  Trusts,  declared  to  have 
been  illegal  by  the  courts,  and  the  somewhat  less  famous 
but  legal  trusts  of  Massachusetts. 

The  Trust  Agreement. — What  the  trust  agreement  of  a 
securities-issuing  trust  embarked  in  business  should  contain 
will  depend  largely  upon  the  result  sought  to  be  accom- 


230    SECURITIES-ISSUING   ORGANIZATIONS 

plished  and  the  few  statutory  limitations  that  are  found  in 
the  several  states.  There  are,  however,  some  general  rules 
of  law  that  should  be  observed.  An  admirable  set  of 
directions  covering  these  essential  rules  has  been  drafted 
by  Mr.  John  H.  Sears,^  and  is  given  below. 

"1.  The  trust  instrument  should  fix  the  term  of  dura- 
tion of  the  trust,  or  its  earlier  cessation  by  prescribed  ac- 
tion, as  say  by  a  vote  of  two-thirds  of  its  certificate 
holders.  The  limit  within  which  this  term  may  continue 
and  its  form  of  expression  are  referable  to  local  law,  as 
explained. 

"  2.  The  particular  business  to  be  conducted  should  be 
stated  with  enough  of  precision  to  notify  those  who  deal 
with  trustees  as  to  the  extent  of  their  powers. 

"  3.  The  instrument,  to  resolve  all  doubt  as  to  its  crea- 
tion of  a  trust,  should,  along  with  the  vesting  of  legal  title, 
commit  to  the  trustees  the  absolute  control  of  the  trust 
property,  wdth  full  power  to  make  it  answerable  for  their 
acts  and  contracts  in  the  conduct  of  the  business  of  the 
trust.  Any  power  of  removal  or  change  of  trustees  should 
exclude  any  right  to  invalidate  prior  contracts,  or  repudiate 
responsibility  for  prior  acts,  within  the  apparent  scope  of 
their  powers. 

"  4.  The  particular  property  of  w^hich  the  trust  estate  is 
to  consist,  in  its  original  form  or  as  afterwards  to  be  in- 
vested, should  be  described  so  as  to  admit  of  ready  identi- 
fication and  by  apt  words  the  legal  title  should  be  vested 
in  the  trustees  and  their  successors. 

"  5.  The  right  of  trustees  to  act  singly  or  by  a  majority 
or  collectively,  either  generally  or  specially,  should  be  set 
forth,  and  whether  or  when  their  contracts  should  be  in 
writing,  or,  if  oral,  what  ratification,  if  any,  of  a  single 
trustee's  acts  should  be  required  as  a  condition  precedent 
to  their  validity.    Also  a  collective  name  may  seem  to  be 

3  Ibid.  pp.  249-251. 


THE    BUSINESS    TRUST  231 

uf  advantage  to  a  trust.  If  so,  the  trust  instrument  should 
adopt  the  name,  with  such  signing  and  counter-signing  as 
it  may  seem  advisable  to  prescribe. 

"  6.  The  trust  instrument  should  vest  specifically  in  the 
trustees  the  right  to  stipulate  for  personal  exemption  from 
liability  in  making  of  contracts,  the  right  to  indemnity  out 
of  the  trust  where  they  may  be  held  personally  liable,  and 
the  right  to  pledge  the  trust  property  for  their  contracts, 
and  it  should  contain  a  clause  for  exemption  of  certificate- 
holders  from  personal  liability.  It  should  be  provided  that 
all  written  contracts  should  contain  these  features,  so  as 
to  bring  them  to  the  notice  of  parties  contracting  with  the 
trustees. 

"  7.  The  instrument  should  provide  how  many  shares, 
and  the  different  kind  of  shares,  if  any,  in  a  trust  are  to  be 
issued,  their  transfer  and  how  evidenced,  that  they  are  per- 
sonal property  to  pass  by  succession  as  other  personal 
property  and  that  the  death  of  a  holder  shall  not  affect  in 
any  way  the  continuance  of  the  trust,  nor  such  death  give 
to  any  person  any  right  for  an  accounting  or  partition. 

"  8.  Provision  for  meetings  of  shareholders,  regular  or 
special,  election,  removal  or  change  of  trustees,  filling 
vacancies,  investigation  into  the  affairs  of  the  trust  and 
reports  to  shareholders,  and  for  amendments  of  the  trust 
instrument.  What  right  of  inquiry  a  certificate  holder 
should  have,  of  his  independent  motion,  might  be  thought 
advisable  to  be  stated,  as  well  as  under  what  circumstances 
it  may  be  exercised.  It  is  suggested  that,  if  there  is  a  fair 
reason  for  independent  inquiry  by  a  certificate  holder,  this 
could  be  made  plain  to  a  reasonable  number  of  share- 
holders, who  could  join  in  a  request  and  this  right  thus 
not  become  liable  to  abuse,  as  has  been  alleged  in  regard 
to  the  exercise  of  such  right  by  a  stockholder  in  a  corpora- 
tion.   The  place  of  a  business  should  be  stated. 

"  9.  Care  is  to  be  taken  that  in  change  of  trustees  the 


232     SECURITIES-ISSUING    ORGANIZATIONS 

trust  instrument  specifically  should  provide  that  their  suc- 
cessors succeed  to  the  same  rights  and  powers  and  are 
subject  to  the  same  duties  and  liabilities  and  have  like 
compensations  as  the  former  trustees. 

"  10.  All  instruments  of  trust  should  merely  by  way  of 
caution,  make  specific  provision  that  in  no  instance  need 
anyone  dealing  with  the  trustees  have  any  obligation,  either 
in  law  or  equity,  resting  upon  him  to  look  after  the  appli- 
cation of  any  trust  funds  or  property  coming  into  the  hands 
of  the  trustees.  This  caution  is  in  view  of  an  old  doctrine, 
about  purchasers  from  trustees  seeing  to  the  application  of 
purchase  money  to  purposes  of  the  trust.  Such  a  provision 
takes  away  all  question  as  to  intent  of  settlors  in  this 
regard." 

Types.  —  Three  types  of  business  trusts  have  come  into 
more  or  less  general  use.  These  are  (1)  operating  trusts, 
(2)  holding  or  combination  trusts  and  (3)  investment 
trusts.  The  distinction  between  them  is  largely  found  in 
the  purpose  for  which  the  trust  is  organized. 

Operating  trusts  are  organized  to  carry  on  a  business 
directly  through  the  operation  of  a  business  plant  and 
equipment  by  the  trustees  and  their  duly  appointed  agents. 
This  type  is  well  represented  by  "  The  Massachusetts  Gas 
Companies  "  a  trust  organized  by  New  York  and  Boston 
bankers  to  carry  on  the  business  of  supplying  coal,  gas  and 
their  by-products,  etc.,  to  Boston  and  other  New  England 
cities.  A  copy  of  this  trust  agreement,  which  deserves  care- 
ful study,  may  be  found  in  Part  VI  of  this  volume.  Promi- 
nence has  also  been  given  to  it  by  the  so-called  "  Real 
Estate  Trusts  "  which  are  common  in  New  England.  Their 
purpose,  in  general,  is  to  buy,  hold,  improve  and  sell  real 
estate,  a  business  which  cannot,  because  of  statutory 
prohibition,  be  carried  on  by  corporations.  In  the  city  of 
Boston,  alone,  these  real  estate  trusts  own  property  whose 
value  is  considerably  more  than  $300,000,000.     The  tax 


THE    BUSINESS    TRUST  233 

commissioner  of  the  Commonwealth  of  Massachusetts  in 
his  report  to  the  legislature  in  1911  commenting  upon  the 
serviceability  of  trusts  of  this  type,  says:  "  The  right  of 
shareholders,  the  terms  of  office  of  trustees,  their  compensa- 
tion, powers,  duties,  and  limitations  are  more  satisfactorily 
regulated  by  the  terms  of  the  trust  agreement,  which  can 
be  drawn  to  meet  the  special  needs  in  each  case,  than 
could  be  possible  under  the  general  corporation  laws."  ^ 

The  holding  trust  is  an  outgrowth  of  the  voting  trust  so 
frequently  employed  by  stockholders  of  a  corporation  to 
conserve  some  special  interest  by  combining  their  voting 
power.  It  is  at  once  clear,  where  the  majority  of  the 
voting  stock  of  several  corporations  is  placed  in  the  hands 
of  the  same  trustees  as  a  single  trust  estate,  that  the 
trustees  would  thereby  become  empowered  to  control  the 
corporations  whose  stock  they  thus  hold  by  electing  direc- 
tors who  will  carry  out  their  wishes,  or  by  electing  them- 
selves to  those  positions.  The  capital  of  such  a  trust  con- 
sists chiefly  of  securities  which  are  constituted  a  trust  fund 
not  for  the  purpose  of  conducting  or  operating  any  par- 
ticular business  enterprise,  but  to  serve  merely  as  a  con- 
venient form  of  organization  to  control  the  activities  of 
operating  units  that  were  already  established  or  were  subse- 
quently to  be  established.  They  are,  pure  combination 
organizations  seeking  to  harmonize  and  unify  the  business 
policies  of  the  units  that  they  control.  Where  the  controlled 
units  are  corporations,  it  has  been  held  by  the  courts,  that 
such  holding  trusts  are  illegal  because  corporations  may 
combine  only  as  permitted  by  statute,  -and  in  such  in- 
stances committed  an  act  ultra  vires  by  themselves  becom- 
ing parties  to  the  agreement.^  In  a  subsequent  case  where 
the  corporations  themselves  were  not  parties  to  the  agree- 
ment the  court,  nevertheless,  held  that  the  separate  entity  of 

^  Mass.  Acts  and  Resolves,  1911,  ch.  55. 

8  State  V.  Standard  Oil  Co.,  49  Ohio  St.  137  (1892),  aud  others. 


234     SECURITIES-ISSUING   ORGANIZATIONS 

the  corporations  had  been  disregarded  and  the  agreement 
was  illegal."  But  when  statutory  authority  is  granted,  hold- 
ing trusts  that  control  corporations  are  quite  legal,  as  is 
also  the  case  if  the  controlled  organizations  are  of  the  non- 
corporate type.'^ 

The  investment  trust  is  like  the  holding  trust  in  that  the 
trust  fund  consists  chiefly  of  securities,  but  it  differs  from 
the  latter  in  its  methods  and  purposes.  While  the  purpose 
of  the  holding  trust  is  control  over  other  organizations,  that 
of  the  investment  trust  is  to  reduce  to  a  minimum  the  risk 
of  loss  arising  out  of  ownership  of  securities.  The  method 
followed  in  constituting  such  trusts  consists  essentially  of 
creating  a  trust  fund  on  shares  and  utilizing  this  to  pur- 
chase securities  of  a  large  number  of  enterprises  so  that 
the  beneficiaries,  or  shareholders,  will  receive  an  average 
profit  rather  than  to  run  the  risk  of  fluctuations  in  divi- 
dends. In  other  words,  they  seek  to  reduce  the  unequal 
earnings  of  many  undertakings  to  a  uniform  average  rate 
and  thereby  to  reduce  the  small  investor's  risk.  This  type 
of  organization  first  came  into  prominence  in  England  dur- 
ing the  decade  1870-1880  when  a  considerable  number  of 
these  trusts  were  organized. 

Speculative  securities-holding  trusts  very  much  like  the 
investment  trust  are  also  to  be  found,  chiefly  in  England. 
They  differ  from  the  investment  trust  in  that  their  opera- 
tions consist  of  trading  in  securities  thereby  deriving  an 
income  from  the  purchase  and  sale  of  securities  and  not 
primarily  from  dividends. 

6  U.  S.  V.  Standard  Oil  Co.,  of  N.  J.  (1911),  221  U.  S.  1,  I.  C.  41. 

7  For  a  trust  agreement  illustrating  this  type  see  that  of  the 
Standard  Oil  Trust  given  in  Part  VI  of  this  volume. 


PART  IV 

COMBINATION  ORGANIZATIONS 


CHAPTER   XIII 
BUSINESS  COMBINATION:   ITS  CAUSES  AND  FORMS 

The  phenomenon  of  combination  of  entrepreneurial 
units,  even  to  a  point  little  short  of  complete  monopoly, 
is  perhaps  the  most  characteristic  feature  of  modern  in- 
dustrial organization.  This  movement,  which  became  im- 
portant about  the  middle  of  the  last  century,  has  been 
experienced  in  all  the  industrial  countries  of  the  world;  but 
it  has  been  most  pronounced  in  the  United  States,  Ger- 
many and  Belgium  and  less  so  in  England,  France  and 
other  European  countries.  In  the  United  States  it  is  found 
to  exist  and  to  flourish  in  practically  all  of  our  basic  in- 
dustries, and  it  is  now  making  its  appearance  in  the  field 
of  trade,  even  including  retailing.  We  find  it  among  our 
railroads,  ocean  transportation  companies,  public  utilities, 
the  mining,  steel,  and  petroleum  industries,  construction, 
manufacture  of  automobiles,  chemicals,  powder,  tobacco, 
sugar,  electrical  equipment,  etc.,  as  well  as  in  the  meat 
packing  industry,  horticulture,  lumbering  and  fishing.  In 
fact,  there  are  but  few  industries  in  this  country  in  which 
the  phenomenon  of  combination  is  absent  or  where  attempts 
to  introduce  it  have  resulted  in  failure,  as  for  example,  in 
the  manufacture  of  cotton  yarn  and  textiles,  starch,  malt, 
rope  and  twine  and  in  the  production  of  table  salt. 

It  is  this  movement  toward  combination  that  has  in- 
duced Congress  to  enact  the  Interstate  Commerce  Act 
of  1887,  and  the  Sherman  Anti-Trust  Act  of  1890,  and 
subsequently  to  strengthen  them  with  supporting  legisla- 
tion.   The  several  states  also  attacked  the  movement  with 

237 


238  COMBINATION    ORGANIZATIONS 

anti-combination,  anti-pool  and  anti-trust  laws.  But  the 
economic  forces  back  of  it  have  been  so  strong  that  most 
of  the  great  combinations  existing  in  this  country  today 
have  been  formed  in  the  face  of  these  laws,  though  some 
of  them  have  been  held  by  the  courts  to  be  in  violation  of 
the  statutes  against  monopolies,  combinations  in  restraint 
of  trade  and  conspiracies  to  raise  prices,  and  were  ordered 
to  dissolve. 

Causes  of  Combination  and  Concentration.  —  To  enter 
into  an  exhaustive  treatise  on  the  forces  that  make  for 
combination  and  concentration  of  the  business  units  in 
modern  industry  is  somewhat  without  the  purview  of  this 
work  whose  prime  purpose  it  is  to  describe  the  present  day 
types  of  ownership  organization.  However,  without  a 
brief  survey  of  some  of  the  more  important  causes  lying 
at  the  bottom  of  this  phenomenon,  the  picture  would  be 
lacking  in  completeness.  We  may  summarize  them  as  fol- 
lows: (1)  The  economy  of  large-scale  production;  (2)  the 
advent  of  periodic  maladjustments  in  the  relation  of  supply 
to  demand;  (3)  the  tendency  for  competition  to  force 
prices  below  the  cost  of  production;  (4)  the  immobility 
of  economic  capital  represented  by  industrial  plants,  etc.; 
and  (5)  the  pouring  of  surplus  investable  funds  into 
saturated  industries  through  the  activities  of  professional 
promoters. 

A  perfect  balance  between  the  factors  of  supply  and 
demand  can  scarcely  ever  exist  throughout  all  fields  of 
industry.  It  has  been  the  world's  experience  with  the 
present  industrial  system  that  the  demand  for  goods  will 
exceed  the  supply  over  a  period  of  years  that  is  character- 
ized as  a  period  of  rising  prices  and  that,  sooner  or  later, 
the  supply  of  goods  will  exceed  the  demand,  ushering  in  a 
period  of  declining  prices.  Thus,  a  period  of  true  normal 
growth  of  both  demand  and  supply  is  indeed  a  rarity.  It 
exists  largely  as  a  theoretical  concept.   The  laws  of  nature 


CAUSES    AND    FORMS    OF    COMBINATION     239 

are  not  subject  to  human  control,  and  so  long  as  this  is  the 
case,  it  is  extremely  difficult  for  man  to  make  the  supply 
of  goods  balance  his  needs.  He  aggravates  the  forces  be- 
jiind  this  lack  of  balance  still  more  by  the  methods  of 
production  and  distribution  that  he  has  introduced  into 
his  economic  life. 

The  modern  technico-mechanical  method  of  production 
is  characterized  by  its  large-scale  producing  units.  Minute 
division  of  labor,  accompanied  by  highly  specialized  ma- 
chinery, has  made  the  modern  industrial  enterprise  one 
that  can  produce  profitably  only  by  producing  in  large 
masses  of  like  units.  The  cost  of  production  per  unit  is 
lowest  when  a  machine  is  operated  at  its  maximum  rated 
capacity.  This,  coupled  with  the  fact  that  each  succeeding 
stage  in  the  process  of  manufacture  is  dependent  upon  its 
immediately  preceding  stage,  tends  to  keep  the  whole 
system  keyed  up  to  a  capacity  that  will  approximate  the 
maximum  for  the  units  worked.  However,  the  system  is 
insufficiently  elastic  to  permit  of  contraction  of  supply  in 
conformity  to  a  slump  in  demand.  Not  only  is  it  difficult 
in  many  industries  to  make  a  uniform  cut  of  ten  per  cent 
in  the  total  finished  product,  but  such  a  cut  involves  a 
relative  increase  in  the  cost  per  unit  as  prices  fall  because 
of  the  overhead  charges  for  invested  capital. 

This  situation  is  made  clear  by  assuming  that  a  corpora- 
tion operates  three  small  steel  mills,  located  respectively  in 
Pittsburg,  Chicago  and  Scranton.  Each  plant  is  equipped 
with  two  blast  furnaces  which  furnish  the  raw  material 
for  further  manufacture.  The  demand  for  the  products 
of  this  concern  now  falls  off  uniformly  to  three  quarters  of 
the  productive  capacity  of  the  plants.  The  company  can- 
not operate  a  blast  furnace  at  less  than  its  rated  capacity 
without  sustaining  an  enormous  loss,  and  it  continues  to 
operate  them  as  before.  The  same  is  true  of  its  converters 
and    open-hearth    furnaces.     The    individual    production 


240  COMBINATION    ORGANIZATIONS 

centers  of  its  plants  are  not  so  rated  in  their  capacity  as 
to  make  two  lines  of  sequence  each  performing  the  same 
processes  as  the  other.  One  bessemer  converter  might  be 
sufficient  to  meet  its  requirements  in  that  direction,  while 
three  open-hearth  furnaces  complete  the  steel  making 
equipment.  These  can  just  take  care  of  the  full  product  of 
the  two  blast  furnaces.  Such  a  plant  is  obviously  not  a 
multiple  of  like  units  linked  together  into  two  or  three 
complete  chains  of  production  centers  that  can  produce  the 
finished  product  independently  of  each  other.  It  is  itself 
a  single  producing  unit.  Consequently  the  company  will 
continue  to  operate  it  at  its  full  capacity,  at  which  point  the 
cost  of  production  is  lowest,  until  the  continued  over- 
supply  of  steel  products  has  brought  prices  down  so  low 
that  it  will  entail  less  loss  to  the  company  to  shut  down 
completely.  To  reduce  its  output,  the  corporation  must 
close  one  of  its  plants;  for  under  competitive  conditions  of 
production,  it  cannot  operate  all  three  at  much  less  than 
capacity  without  increasing  its  cost  of  production  to  the 
point  of  destroying  its  market. 

While  most  of  our  great  fundamental  industries  are  thus 
confronted  with  this  necessity  for  capacity  production, 
there  are  others  in  which  the  multiple  duplication  of 
mechanical  devices,  as  for  example  in  the  cotton  textile 
industry,  gives  a  relatively  greater  degree  of  elasticity  to 
the  rate  of  production.  In  others  again,  such  as  the  shoe 
manufacturing  industry,  there  is  no  direct  capital  invest- 
ment for  machinery,  but  merely  a  fixed  charge  per  pair  of 
shoes;  hence,  here  also  the  overhead  charges  do  not  increase 
greatly  with  the  reduced  output. 

In  considering  the  demand  side  of  the  equation  we  must 
bear  in  mind  first  of  all  that  the  factor  of  demand  itself 
is  influenced  by  numerous  other  factors,  such  as  the  ca- 
pacity for  consumption  in  a  given  community  of  a  given 
article  at  a  given  price,  and  what  influence  an  over-pro- 


CAUSES    AND    FORMS    OF    COMBINATION      241 

duction  exerts  upon  the  demand.  None  of  these  factors  is 
stable,  neither  does  any  one  progress  at  a  uniform  pace. 
Any  large,  unanticipated  increase  in  a  nation's  general 
supply  of  goods  must  reflect  itself  in  the  form  of  relatively 
lower  prices,  and  tends,  thus,  to  increase  the  general  demand 
for  goods.  This,  however,  does  not  always  mean  that  those 
entrepreneurs  whose  enterprise  has  been  blessed  with  the 
unexpected  increase  in  quantity  of  product  will  receive  a 
greater  profit.  A  bumper  grain  harvest,  or  cotton  crop, 
may  so  reduce  the  price  of  these  commodities  as  to  prevent 
any  financial  benefit  from  accruing  to  the  farmers  and 
planters  who  grew  it.  It  may  even  mean  a  direct  loss  to 
them  since  the  cost  of  producing  it  may  have  exceeded 
the  price  that  it  wdll  bring  on  the  market.  Such,  for  in- 
stance, was  the  condition  of  the  growers  of  these  crops,  in 
1920,  when  quantities  far  in  excess  of  market  requirements 
were  produced. 

However,  such  an  excess  harvest,  because  it  does  result 
in  a  general  lowering  of  prices  in  these  goods,  tends  to 
cause  a  general  speeding  up  of  industries  that  use  them  as 
raw  material.  It  tends  to  lower  the  cost  of  living,  to  bring 
down  wages  and  to  widen  markets.  Railroads  must  be 
equipped  to  handle  the  crops,  mills  to  grind  the  wheat  into 
flour,  and  others  to  work  up  the  cotton  into  consumable 
goods.  All  take  on  greater  activity.  In  this  way  the 
whole  industrial  organization  tends  to  increase  its  pro- 
ductive capacity,  while  new  establishments  spring  up  to 
share  in  the  increased  prosperity. 

It  is  at  once  clear  that  a  series  of  large  harvests,  or  an 
excessive  demand  for  goods  arising  from  war  or  other 
causes,  raises  the  productive  capacity  of  industry  above  the 
normal  requirements  and  draws  new  competitors  into  fields 
that  under  normal  conditions  might  be  considered  to  be  al- 
ready fully  equipped  to  meet  normal  demands.  Capital  is 
constantly  being  attracted  to  industries  in  which  a  profit 


242  COMBINATION    ORGANIZATIONS 

somewhat  above  the  normal  may  be  obtained.  This  process 
continues  until  the  balance  between  supply  and  the  in- 
flated demand  is  restored.  But  sooner  or  later  will  come  a 
time  when  the  supply  exceeds  the  requirements  of  the  com- 
munity. It  may  be  brought  about  gradually  through  a 
falling  off  in  the  rate  of  increase  of  population  or  through 
a  gradual  depletion  of  the  soil,  or  suddenly  by  a  series  of 
crop  failures,  the  erection  of  tariff  walls  cutting  off  outside 
markets,  or  the  like.  Industry  then  comes  suddenly  to 
the  realization  that  it  is  producing  goods  that  it  cannot 
sell,  or  that  it  can  sell  only  at  a  price  that  is  below  the 
cost  of  production. 

It  is  at  this  point  that  the  industry  in  question  is  faced 
with  the  problem  of  readjusting  the  factors  of  supply  and 
demand.  It  must  reduce  its  rate  of  production  or  in- 
crease the  demand  for  the  product.  The  latter  is  or- 
dinarily a  slow  process  that  may  take  a  long  period 
of  time,  and  besides  it  is  one  over  which  the  industry 
has  little  control.  Nevertheless,  a  price  reduction 
would  enable  the  industry  to  make  the  existing 
market  as  effective  as  possible.  A  reduction  in  price  neces- 
sitates a  reduction  in  costs.  Wages  are  attacked  first,  then 
cost  of  materials  and  so  on.  Those  concerns  that  cannot 
make  these  reductions  will  sooner  or  later  close  their  plants. 
Some  may  be  forced  into  insolvency.  But  they  all  remain 
as  potential  competitors,  because  capital  once  sunk  into 
a  specialized  plant  and  equipment  cannot  again  be  re- 
covered. Even  the  insolvent  ones  retain  their  potential 
productive  capacity  for  they  are  seldom  abandoned.  They 
merely  undergo  a  financial  reorganization,  a  change  in  the 
form  of  outstanding  securities,  and  perhaps  a  change  of 
ownership.  They  wait  only  for  the  demand  to  pick  up 
when  they  again  enter  the  field  as  active  competitors,  with 
perhaps  a  slight  advantage  over  others  arising  from  re- 
duced overhead  costs,  for  their  interest  requirements  may 


CAUSES    AND    FORMS    OF    COMBINATION     243 

have  been  reduced  through  reorganization.  Then  as  de- 
mand begins  again  to  revive,  production  is  soon  at  its 
maximum  capacity,  while  new  capital  is  drawn  in  until 
competition  is  more  severe  than  before. 

But  such  lessons  do  not  always  go  unlearned.  Here  and 
there,  may  arise  a  far-sighted  man  who,  through  his  com- 
manding position  in  the  industry,  may  bring  the  warring 
factions  together  for  the  mutual  benefit  of  all  concerned. 
An  agreement  on  prices,  production  or  markets  may  be 
entered  into,  or  an  association  for  regulation  of  competi- 
tion may  be  formed,  or  the  competing  factions  may  be 
bound  together  through  ownership  ties.  This  process  may 
continue  to  the  point  of  monopoly  of  the  industry  or  it  may 
simply  result  in  reducing  the  number  of  establishments  to 
a  point  where  but  a  few  large  combinations  are  in  a  posi- 
tion to  compete  in  an  over-saturated  market. 

However,  it  is  not  always  the  legitimate  entrepreneur 
who  is  at  the  bottom  of  the  combination  movement.  The 
country  is  full  of  professional  promoters,  who,  with  their 
eyes  fixed  upon  the  vast  sums  of  investable  funds  in  banks, 
insurance  companies,  trust  companies  and  other  financial 
institutions,  fall  upon  the  happy  idea  that  a  combination 
can  be  formed.  The  question  of  economic  need  or  ex- 
pediency does  not  concern  them.  They  make  their  profit 
by  organizing  the  new  enterprise,  not  by  operating  it.  It 
is  not  a  difficult  matter  for  them  to  obtain  the  necessary 
finances,  for  the  so-called  "  private  banks "  and  trust 
companies  are  ever  ready  to  enter  into  underwriting  syn- 
dicates to  finance  the  new  enterprise.  They,  like  the  pro- 
moter, step  in,  not  as  entrepreneurs  of  the  undertaking,  but 
as  merchants  who  sell  it  money  capital  in  return  for  its 
securities,  which  they  then  try  to  sell  at  a  profit  to  specu- 
lators and  investors.  Whether  the  economic  conditions 
warrant  the  new  enterprise  and  what  happens  to  it  after- 
wards does  not  greatly  concern  those  that  have  brought 
it  into  being. 


244  COMBINATION    ORGANIZATIONS 

It  is  thus  seen  that  there  are  times  during  which  economic 
conditions  are  such  as  to  usher  in  a  period  of  combination 
that  extends  generally  throughout  the  whole  industrial 
fabric,  and  that  these  periods  are  separated  by  years  of 
commercial  and  industrial  stagnation  during  which  the 
forces  making  for  combination  lie  more  or  less  dormant. 
This  is  not  only  true  of  industry  in  the  United  States, 
but  also  in  all  of  the  great  industrial  countries  of  the  world. 
But  before  entering  into  a  discussion  of  these  periods,  it 
will  be  necessary  to  explain  the  direction  in  which  combina- 
tion may  take  place. 

Direction  in  Which  Combination  May  Take  Place. — 
Let  us  assume  that  each  entrepreneurial  unit  in  the  steel 
industry  confines  its  activities  entirely  to  the  performance 
of  a  single  step  in  the  process  of  manufacture  necessary  to 
produce  a  marketable  product  that  serves  as  raw  material 
for  the  units  performing  the  next  higher  step.  We  may 
then  sort  them  out  into  groups  composed  of  like  units  and 
arrange  them  into  horizontal  rows.  These  rows  may  next 
be  arranged  according  to  the  sequence  of  the  stages  of 
manufacture  necessary  to  produce  the  finished  product. 
By  this  means,  as  indicated  in  the  diagram  on  opposite  page, 
we  obtain  horizontal  rows  of  like  units,  and  vertical  columns 
of  unlike  units,  that  are  capable  of  performing  all  the  steps 
necessary  to  produce  the  finished  product. 

If  now,  as  a  result  of  economic  conditions,  it  becomes 
necessary  or  desirable  to  combine  the  units,  we  may  do  so 
in  either  of  two  directions,  namely,  we  may  combine  the 
like  units  in  the  horizontal  rows,  or  the  unlike  units  of  the 
vertical  columns.  The  former  is  usually  known  as  hori- 
zontal combination  and  the  latter  as  vertical  combination 
or  integration. 

Horizontal  combination  aims  usually  at  a  control  over  the 
product  from  the  standpoint  of  market  conditions  pre- 
vailing in  the  industry  that  it  embraces.     Such  combines 


CAUSES    AND    FORMS    OF    COMBINATION      245 


seek  ordinarily  to  control  the  selling  price  of  the  product, 
to  regulate  the  production  in  order  to  prevent  an  over- 
supply,  to  apportion  the  demand  among  the  units  by  as- 
signing to  each  a  certain  geographical  territory  or  a  given 
per  cent  of  the  total  estimated  production  for  the  year,  or  to 
obtain  a  complete  monopoly  over  the  product.  Since  it 
depends  to  a  much  greater  degree  upon  control  over  mar- 

^  HORIZONTAL  OR  TRADE  COMBINATION 


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keting,  than   over  production   for   its   effectiveness,   it   is 
frequently  called  trade  combination. 

In  the  United  States,  this  form  of  combination  began  to 
gain  prominence  shortly  after  the  close  of  the  Civil  War. 
From  that  time  on  it  continued  more  or  less  unhampered 
until  the  passage  of  the  Interstate  Commerce  Commission 
Act,  of  1889,  and  the  Sherman  Anti-Trust  Act,  of  1890. 
Since  the  passage  of  these  acts  it  has  proceeded  at  a  some- 
what lessened  pace,  but  with  equally  important  effect.  It 
manifests  itself  in  several  ways,  such  as  the  building  up 
of  large-scale  business  units  followed   by  a   binding  to- 


246  COMBINATION    ORGANIZATIONS 

gether  of  these  units  through  agreements  into  associations, 
federations,  and  holding  company  organizations.  Thus, 
the  census  statistics  show  that  in  1860  there  were  some 
2500  business  establishments  engaged  in  the  manufacture 
of  agricultural  implements  and  by  1910  there  remained  but 
640  whose  total  output  was  valued  at  over  $94,000,000;  but 
34  of  the  640  each  valued  their  annual  product  at  over 
$1,000,000  and  these  accounted  for  64.3  per  cent  of  the 
total  product.  Establishments  engaged  in  the  tanning, 
curing  and  finishing  of  leather  numbered  about  7600  in 
1870,  but  by  1910  only  919  are  reported,  but  78  of  these 
accounted  for  nearly  one  half  of  the  total  product  valued 
at  over  $150,000,000.  The  same  condition  exists  in  the 
case  of  carpet  mills,  tobacco  manufacturing  establishments, 
smelting  and  refining  of  copper  and  lead,  worsted,  woolen 
and  felt  mills  and  many  other  industries.  This  process  may 
take  place  very  rapidly,  as  illustrated  in  the  case  of  the 
Diamond  Match  Company  which,  in  1880,  is  reported  to 
have  bought  up  some  75  match  factories  which  it  there- 
upon combined  into  37,  and  in  1900  it  had  reduced  these  to 
16  in  number. 

There  are,  however,  a  few  industries  that  are  conspicuous 
for  their  resistance  against  this  method  of  combination. 
Among  these  are  the  cotton  textile  and  the  boot  and  shoe 
industries.  The  former  is  not  a  fit  subject  for  this  type 
of  combination  because  of  the  relatively  greater  degree 
of  elasticity  in  the  adjustment  of  output  to  demand  and 
the  great  range  of  products  that  a  single  mill  is  capable  of 
producing.  In  the  shoe  industry,  combination  has  been 
confined  largely  to  a  monopoly  through  control  of  patents 
covering  the  important  machines  used  in  making  shoes, 
rather  than  of  the  makers  of  the  finished  product.  These 
patents  are  held  by  the  United  Shoe  Machinery  Company 
which  leases  the  machines  to  shoe  factories. 

In  their  looser  form  or  embryonic  stage,  these  combina- 


CAUSES    AND    FORMS    OF    COMBINATION     247 

tions  manifest  themselves  as  associations  based  on  agree- 
ments between  the  units  usually  seeking  to  control  prices, 
accompanied  at  times  with  apportionment  of  the  market, 
pooling  of  profits  and  limiting  production.  Thus,  we  find 
in  1901  the  American  Publishers  Association,  whose  mem- 
bers published  about  90  per  cent  of  American  books,  co- 
operating with  the  equally  extensive  American  Booksellers' 
Association  in  an  attempt  to  control  the  resale  price  of 
copyrighted  books;  and  later  in  the  drug  trade,  national 
organizations  of  manufacturers,  of  wholesalers  and  of  re- 
tailers cooperating  with  one  another  for  the  same  pur- 
pose. We  find  them  in  the  wall  paper  industry,  the  lumber 
industry,  oil  cloth,  powder,  tobacco  and  a  great  many 
others.  But  such  associations  have  almost  invariably  run 
counter  to  the  federal  and  state  laws  against  combinations 
in  restraint  of  trade.  For  this  and  other  reasons,  there  has 
been  a  tendency  to  form  horizontal  combinations  by  making 
use  of  the  holding  company. 

Some  of  the  largest  of  our  horizontal,  holding-company 
combinations  were  formed  during  the  great  combination  or 
"  trust "  period,  1897  to  1902.  Among  these  may  be  men- 
tioned the  telephone  combination  effected  through  the 
American  Telephone  and  Telegraph  Company  in  1900,  that 
now  owns  or  controls  about  70  per  cent  of  all  the  telephone 
stations  in  the  country,  which  in  1919  numbered  over  12 
million.  The  famous  Northern  Securities  Company, 
through  which  the  control  over  the  Great  Northern  Railway 
Company,  the  Northern  Pacific  Railway  Company  and  the 
Chicago  Burlington  and  Quincy  Railroad  Company  was 
unified,  was  formed  in  1901.  The  International  Mercantile 
Marine  Company,  combining  some  eight  or  nine  great 
trans-Atlantic  steamship  lines,  also  was  formed  at  about 
this  time.  Since  1910,  the  same  phenomenon  has  made  its 
appearance  among  trading  establishments.  In  the  drug 
business  we  now  find  the  American  Druggists'  Syndicate 


248  COMBINATION    ORGANIZATIONS 

and  the  United  Drug  Company,  which,  however,  are  to 
some  extent  integrations.  Similarly,  we  have  the  United 
Retail  Stores  Corporation  organized  in  1919,  the  Associated 
Dry  Goods  Corporation,  1916,  and  tjie  Mercantile  Stores 
Company,  Inc.,  1919,  together  with  a  host  of  others,  the 
list  of  which  is  growing  rapidly. 

Vertical  combination,  or  integration,  seeks  to  gain  a 
market  advantage  by  establishing  a  control  or  ownership 
interest  over  the  establishments  that  perform  the  greater 
part  of  the  stages  of  production  preceding  and  succeeding 
the  one  that  forms  the  chief  operation  of  the  key  unit. 
Thus,  the  pig  iron  producer  in  the  diagram  may  extend  his 
operations  forward  in  the  direction  of  the  finished  product 
or  may  reach  backward  producing  his  own  raw  materials. 
When  the  process  has  been  carried  to  completion  the  com- 
bination is  no  longer  dependent  upon  independent  producers 
of  raw  materials  and  half-finished  products,  and  it  will 
also  have  reduced  the  effect  that  fluctuating  markets  will 
have  upon  it,  for  it  need  not  worry  about  market  conditions 
for  steel  ingots  or  rolling  mill  products  as  such.  It,  of 
course,  also  tends  to  reduce  its  costs  of  production  to  a 
minimum  and  to  stabilize  them  in  so  much  as  it  no  longer 
need  pay  a  profit  to  intermediate  manufacturers  and  pro- 
ducers of  raw  materials.  But  since  integration  demands 
the  closest  cooperation  between  the  several  units  that  per- 
form the  different  stages  of  manufacture  leading  up  to  the 
final  stage  involved,  it  necessitates  a  much  more  compre- 
hensive and  durable  control  than  might  suffice  to  bind  a 
horizontal  combination  together.  For  this  reason  vertical 
combinations  are  usually  built  up  through  the  acquisition 
of  an  ownership  interest  in  the  several  units  that  are  to  be 
combined. 

In  the  iron  and  steel  industry  one  of  the  chief  forces 
back  of  the  integration  movement  seems  to  have  been  the 
change  in  demand  from  iron  to  steel.     The  process  has 


CAUSES    AND    FORMS    OF    COMBINATION     249 

been  well  described  by  the  president  of  the  Republic  Iron 
and  Steel  Company  in  testimony  taken  in  a  suit  for  the 
dissolution  of  the  United  States  Steel  Corporation.  This 
account  is  as  follows:  "We  have  practically  eliminated 
all  our  scattered  iron  mills,  have  concentrated  them  in  the 
operation  at  a  few  points  of  production.  So,  today  we 
produce  practically  but  little  iron  and  are  manufacturing 
about  1,000,000  tons  of  steel  per  anum.  This  is  what  we 
call  an  integrating  process;  that  was  part  of  it,  the 
addition  of  the  mineral  and  coke  and  blast  furnaces,  and 
balancing  up  operations  generally  completing  the  integrat- 
ing process.  .  .  .  This  integrating  process  that  I  speak  of 
attended  our  development  of  the  steel  end  of  our  business. 
We  did  not  need  it  so  much  when  we  were  simply  manu- 
facturing iron.  It  was  done  for  economic  and  trade  reasons 
on  account  of  the  increased  demand  for  steel  and  the  de- 
creased demand  for  iron."  ^ 

The  great  period  of  integration  in  American  industry 
was  ushered  in  about  1897.  Business  had  just  emerged 
from  a  long  period  of  depression  which  began  with  the 
financial  collapse  of  1893.  Several  events  occurred  and  cer- 
tain circumstances  were  present  that  gave  the  integration 
movement  the  initial  impetus  that  it  required  to  set  it 
in  motion.  The  first  of  these  events  was  the  passage  by 
the  legislature  of  the  state  of  New  Jersey  of  an  act  giving 
to  all  corporations  chartered  by  that  state  the  power  to 
hold  the  securities  of  other  New  Jersey  and  foreign  cor- 
porations, and  to  exercise  with  respect  thereto  all  the  rights 
and  privileges  of  natural  security-holders.  Thus,  a  new 
form  of  organization,  most  admirably  adapted  to  combina- 
tion purposes,  was  provided.  The  second  event  was  the 
wonderful  American  wheat  crop  of  1897  coupled  with  a 
general  failure  of  crops  in  Europe.  While  Europe  had 
a  shortage  of  from  300  to  400  million  bushels,  we  had 

^  United  States  v.  United  States  Steel  Corporation,  223  Fed.  55. 


250  COMBINATION    ORGANIZATIONS 

a  surplus  of  over  100  million  bushels.  This  condition 
resulted  in  a  real,  thoroughgoing  industrial  revival.  Compe- 
tition was  soon  again  at  its  height  and  showed  all  indi- 
cations of  the  approach  of  a  general  battle  of  giant  es- 
tablishments for  the  elimination  of  the  weaker  and  the 
survival  of  the  fittest.  In  the  third  place,  there  was  an 
equally  rapid  expansion  of  our  foreign  trade-  During 
the  depression  the  American  people  had  been  economizing 
and  by  1897  vast  quantities  of  manufactured  products  had 
accumulated.  The  manufacturers  feared  that  these  would 
glut  the  market  and  decided  to  get  rid  of  them.  Germany 
and  Great  Britian  had  recovered  from  the  depression  some- 
what earlier  than  the  United  States,  and  had  begun  a 
period  of  rapid  colonial  development.  The  American  goods 
were  rushed  into  these  colonies,  into  Prussian  and  European 
markets,  even  to  Germany  and  England,  where  they  were 
sold  at  much  less  than  the  cost  of  their  manufacture.  As 
a  result,  our  export  trade  in  manufactures  jumped  by 
hundreds  of  millions  of  dollars.  In  addition  to  these  fac- 
tors there  were  on  hand  in  the  American  banks,  insurance 
and  trust  companies  vast  accumulations  of  investable  funds 
representing  the  savings  of  the  people.  The  financiers 
were  ready  to  put  these  funds  to  work.  Opportunity 
beckoned  and  the  industrial  and  professional  promoter 
answered  the  call.  The  period  of  combination  that  fol- 
lowed, with  the  possible  exception  of  that  which  occurred 
in  Germany  following  the  close  of  the  World  War,  has  had 
no  parallel  in  history. 

During  the  first  few  years  of  the  period,  the  combina- 
tions, or  "  trusts "  as  they  have  been  popularly  called, 
were  largely  along  horizontal  lines.  Railways  were  consoli- 
dated into  a  few  great  systems,  ocean  and  coastwise  steam- 
ship combinations  were  formed  and  the  number  of  estab- 
lishments in  several  stages  of  production  in  the  iron  and 
steel  industry  was  reduced.    This  lasted  until  1901,  wheo 


CAUSES    AND    FORMS    OF    COMBINATION      251 

a  general  scramble  to  integrate  was  ushered  in  through  the 
formation  of  the  United  States  Steel  Corporation.  But  there 
was  only  so  much  money  with  which  to  do  the  work.  The 
movement  came  to  a  stop  in  1902  as  suddenly  as  it  had 
begun.  Not  only  had  the  supply  of  investable  capital  be- 
come exhausted,  but  the  general  public  had  lost  confidence. 
Professional  promoters,  impelled  by  speculative  profits, 
had  poured  so  much  "  water  "  into  many  of  these  combina- 
tions that  they  soon  failed,  causing  a  loss  of  millions  to 
gullible  investors  who  had  relied  upon  false  prospectuses. 
Speculation  overdid  itself  and  hundreds  of  millions  in  the 
stocks  of  these  great  combinations  were  batted  back  and 
forth  like  shuttlecocks  between  brokers  and  speculators  on 
the  exchanges.  There  they  remained  for  a  period  of  years 
until  the  time  when  the  public  could  be  convinced  that 
they  were  legitimate  and  reasonably  safe  investments. 
Even  today  the  public  remains  unconvinced  of  the  sound- 
ness of  many  of  them- 

During  the  period  from  1902  through  the  depression  fol- 
lowing the  financial  panic  of  1907,  the  forces  making  for 
combination  were  noticeably  dormant.  But  with  the  re- 
vival of  business  in  1909,  combinations  began  again  to  be 
formed,  particularly  in  the  newer  industries,  such  as  auto- 
mobile manufacture  and  its  related  undertakings.  The 
outbreak  of  the  World  War  in  the  summer  of  1914  checked 
it  temporarily,  only  to  give  it  a  new  impetus  during  1915, 
1916  and  the  first  few  months  of  1917.  These  years  wit- 
nessed many  combinations,  both  along  horizontal  and  ver- 
tical lines,  among  munition  establishments,  shipping  and 
foreign  trade  concerns  and  retail  trade  companies,  while 
the  great  steel  companies  erected  shipbuilding  plants  and 
carried  their  integration  a  few  steps  forward.  This  short 
period  was  again  brought  to  a  close  with  the  advent  of  the 
business  depression  that  began  in  1919. 

In  Europe,  the  progress  of  combination  had  a  similar 


252  COMBINATION    ORGANIZATIONS 

history  but  was  by  no  means  uniform  in  the  several  coun- 
tries. In  England,  it  can  be  said  to  have  begun  shortly 
after  the  passage  of  the  Limited  Companies  Act,  of  1862, 
and  to  have  reached  the  climax  during  the  decade  from 
1880  to  1890.  The  English  business  combination  is  neither 
horizontal  nor  vertical,  but  rather  financial  in  character, 
being  effected  through  what  is  called  the  "  investment 
company  "  described  in  a  later  chapter.  The  reasons  for 
the  deflection  of  the  movement  along  this  peculiar  tangent 
are  perhaps  to  be  found  in  the  laws  against  organizations 
and  combinations  in  restraint  of  trade,  in  the  conception 
based  upon  economic  teachings,  that  free  competition  is  the 
natural  order  of  business  which  may  best  be  conducted  as 
individual  enterprise,  and  in  the  policy  of  free  trade  that 
makes  it  almost  impossible  to  have  higher  prices  within  the 
country  than  exist  without.  But  despite  these  obstacles,  a 
few  combinations  have  been  formed,  particularly  in  the 
South  African  Mining  Industry  and  in  the  manufacture  of 
soap.  Lever  Brothers,  Ltd.,  have  practically  a  monopoly 
of  the  latter  industry.  These,  however,  are  but  exceptions 
rather  than  the  rule. 

In  Germany,  the  combination  movement  appears  to  have 
begun  in  earnest  during  the  decade  preceding  the  year  1890. 
Instead  of  being  legally  suppressed,  it  was  encouraged. 
As  a  result  of  this  attitude  it  naturally  followed  the  hori- 
zontal lines  which  did  not  generally  affect  the  ownership 
interest,  but  brought  into  being  great  syndicates  to  control 
the  distribution  of  the  product.  These  syndicates  are 
called  "  kartells."  The  exacting  requirements  of  the  law 
concerning  corporate  promotions  and  capitalization  appear 
to  have  interfered  somewhat  with  the  process  of  integration, 
and  to  have  brought  about  a  condition  of  financial  combina- 
tion centering  about  the  great  banks,  while  large  numbers 
of  so-called  "  finance  companies  "  tie  the  establishments  of 
each  industry  together  into  a  vast,  more  or  less  unified 


CAUSES    AND    FORMS    OF    COMBINATION     253 

network  dominated  by  a  central  concern  and  its  affiliated 
banking  interests-  However,  since  the  close  of  the  war  the 
weakness  of  horizontal  combination  has  become  apparent. 
It  is  too  susceptible  to  control  by  labor  organizations  and 
presents  too  good  a  target  for  the  application  of  state  con- 
trol or  the  institution  of  state  ownership.  Thus,  under  the 
leadership  of  such  men  as  Hugo  Stinnes,  August  Thyssen, 
the  Krupp  group  and  others,  a  period  of  integration  has  been 
ushered  in  that  has  been  surpassed  only  by  the  great 
American  trust  period.  What  the  final  result  of  this  move- 
ment will  be,  it  is  difficult  to  foretell. 

In  Belgium,  combinations  have  followed  the  lead  of  Ger- 
many, since  its  industrial  system  corresponds  most  closely 
to  that  of  its  larger  neighbor,  France,  which  is  not  an 
industrial  country  in  the  modern  sense  of  the  term  but 
rather  has  contented  itself  with  putting  its  savings  into 
foreign  investments,  seems  in  a  large  measure  to  have 
followed  the  English  example.  Switzerland  with  its  cosmo- 
politan population,  seems  to  have  borrowed  not  only  from 
its  several  European  neighbors  but  also  from  the  United 
States.  Combinations  in  other  European  countries  have, 
for  the  most  part,  emanated  from  one  or  the  other  of 
the  greater  industrial  nations  and  cannot  be  said  to  have 
been  influenced  greatly  by  any  native  or  local 
considerations. 

Classification  of  Combination  Organizations.  —  Enough 
has  already  been  said  to  indicate  that  there  are  several 
types  of  organizations  that  may  be  employed  for  purposes 
of  combining  entrepreneurial  units.  These  may  be  divided 
into  two  broad  groups,  namely,  (1)  those  that  do  not 
ordinarily  involve  a  claim  on  the  capital  of  the  units 
involved  and  (2)  those  that  are  instituted  through  the 
ownership  right.  In  each  group  there  are  several  classes 
as  shown  by  the  following  outline: 


254  COMBINATION    ORGANIZATIONS 

A.  Combinations    ordinarily    not    involving    ownership 
rights : 

(1)  Associations  formed  by  means  of  agreements  between  units 

that  retain  their  autonomy,  but  pledge  themselves  to 
cooperate  in  carrying  out  the  aims  and  purposes  of  the 
organization.  They  are  commonly  known  as  "  business 
men's  associations." 

(2)  Factors'  Agreements,  whereby  producers  and  distributors 

seek  to  exercise  a  control  over  the  product  with  respect 
to  price,  conditions  of  sale,  etc.,  while  it  is  being  dis- 
tributed by  independent  businesses.  The  most  common 
types  are  "  price  control  agreements,"  "  tying  contracts," 
and  the  Uke. 

(3)  Federations    created    by    agreements    between    combining 

units  that  retain  considerable  autonomy,  but  delegate 
to  a  central  body  in  which  they  are  usually  represented 
the  power  to  control  certain  phases  of  their  business. 
There  is  usually  documentary  evidence  of  their  exist- 
ence. The  most  important  types  are  known  as  "  pools," 
"  karteUs  "  and  "  syndicates." 


B.  Combinations  involving  ownership  rights: 

(4)  Securities-combinations  formed  through  the  acquisition 
by  a  person  or  a  business  organization  of  the  securities 
issued  by  other  ownership  organizations.  They  may  or 
may  not  be  for  the  purpose  of  control.  Where  control  is 
the  aim  it  is  exercised  through  application  of  the  rights 
resting  in  the  security-holder.  The  holding  corporation, 
the  combination  trust  and,  more  rarely,  the  joint  stock 
company  are  employed  for  this  purpose.  The  various 
means  of  utilizing  this  method  of  combination  will  be 
described  under  the  title  of  securities-substitution 
companies.  These  constitute  the  most  characteristic 
ownership  feature  of  our  modern  business  organization. 


CAUSES    AND    FORMS    OF    COMBINATION     255 

(5)  Fusions  arising  out  of  a  unification  of  the  assets,  liabili- 
ties and  general  business  of  several  units,  leaving  but  a 
single  unit.  They  include  "  mergers "  and  "amalga- 
mations." " 

This  classification  is  based  upon  the  extent  to  which  the 
independent  action  and  existence  of  the  individual  owner- 
ship unit  is  compromised,  limited  or  controlled.  There  is 
no  clear-cut  line  of  demarcation  dividing  the  several  types. 
A  single  combination  may  employ  one  or  more  of  them  in 
its  make-up.  While  pure  forms,  that  are  representative  of 
the  several  classes,  are  very  common,  they  are  perhaps  no 
more  so  than  the  hybrid  types.  For  this  reason  it  is  deemed 
advisable  to  describe  and  treat  them  in  groups,  namely; 
(1)  those  that  ordinarily  do  not  involve  ownership  rights 
and  (2)  those  that  involve  such  rights  directly.  And  while 
it  may  be  objected  that  the  former  class  is  not  a  proper 
subject  for  a  work  of  this  kind,  because  those  types  of 
combinations  introduce  no  new  principle  into  the  ownership 
organization;  yet  it  must  be  conceded  that  without  some 
understanding  of  these  forms  of  combination,  it  would  be 
difficult  to  portray  the  ownership  organizations  of  today  to 
a  degree  even  approaching  completeness. 

2  Combinations  formed  under  methods  4  and  5  are  frequently 
called  consolidations.  Under  this  heading  the  several  types  of 
fusions  were  fully  explained  in  Chapter  XI. 


CHAPTER   XIV 

COMBINATIONS  ORDINARILY  NOT  BASED  ON  OWNER- 
SHIP  RIGHTS 

A.  Associations  as  Business  Combinations 

Association  is  a  human  instinct  that  is  quite  as  preva- 
lent among  business  entrepreneurs  as  in  any  other  class  of 
society.  It  furnishes  that  element  of  cohesion  essential  to 
the  existence  of  organized  civilized  society;  and  is  es- 
pecially developed  in  the  field  of  business  enterprise  where 
it  fosters  that  stability  and  progress  so  necessary  for  the 
fullest  development  of  business  opportunity.  No  class  of 
persons  knows  better  than  the  business  man  the  value  of 
association,  and  no  other  class  has  utilized  it  to  such  great 
advantage.  He  knows  full  well  the  truth  of  the  old  adage 
"  in  union  there  is  strength,"  and  proceeds  to  organize  his 
general  and  specialized  types  of  associations.  This  he  has 
done  for  centuries  and  is  still  doing,  on  a  grander  scale 
than  ever  before. 

Back  in  the  middle  ages  the  chaotic  and  unstable  politi- 
cal conditions  led  to  the  development  and  organization  of 
the  Gild  Merchant  in  the  incorporated  towns  and  boroughs 
where  business  first  began  to  rear  its  infant  head.  These 
organizations  had  for  their  purpose,  among  other  things, 
the  adoption  of  uniform  trade  practices,  weights  and  mea- 
sures and  the  like;  but  they  soon  became  part  and  parcel 
of  the  town  government  and  lost  their  business  character. 
Trade  Gilds  made  up  of  all  masters  (entrepreneurs)  en- 
gaged in  a  given  trade  within  the  community,  took  their 
place    as    business    men's    associations.      The    weavers, 

256 


ASSOCIATIONS,    FEDERATIONS,    ETC.        257 

butchers,  bakers,  fullers,  wheelwrights,  etc.,  each  had  their 
own  trade  gild  seeking  to  control  conditions,  production, 
prices  and  the  like.  At  a  later  date,  when  foreign  com- 
merce slowly  made  its  way  through  pirate-infested  seas 
to  more  or  less  hostile  foreign  shores,  there  arose  in  Eng- 
land the  Merchants  of  the  Staple  and  the  Merchant  Ad- 
venturers ;  associations  that,  with  the  aid  of  the  king,  sought 
to  stabilize,  foster  and  protect  this  new  born  trade,  that 
they  and  their  communities  might  benefit  thereby.  In 
Northern  Europe,  particularly  in  Germany,  there  grew  up 
in  the  same  way  the  Hanseatic  League.  This  League,  be- 
cause of  the  impotency  of  the  governments  of  the  numerous 
small  states  in  which  its  members  carried  on  their  com- 
mercial enterprises,  was  soon  forced  to  take  upon  itself 
also  political  and  governmental  duties.  And  while  it  was 
primarily  a  commercial  organization,  it  was  more  powerful 
than  many  monarchs  of  its  day. 

From  these  early  beginnings  the  business  men's  associa- 
tion has  come  down  to  us  in  the  form  of  chambers  of  com- 
merce, boards  of  trade,  commercial  associations  and  trade 
and  industrial  associations.  Shorn  of  its  active  govern- 
mental powers  by  relatively  strong  and  stable  governments, 
it  contents  itself  largely  wath  building  up  and  developing 
its  community,  trade  or  industry,  with  shaping  commercial 
and  labor  policies,  tax  programs  and  the  like.  It  is  ever 
active  and  watchful  of  legislation  affecting  business.  There 
is  scarcely  a  municipal,  state  or  national  government  where 
its  lobbyists  are  not  constantly  at  work-  And  even  today, 
it  occasionally  rises  up  in  its  might  to  oust  from  office  a 
political  party  whose  policies  it  does  not  like,  as  is  well 
shown  by  the  part  played  by  such  associations  in  breaking 
the  hold  of  the  Non-Partisan  League  in  North  Dakota. 

These  present  day  business  men's  associations  may  be 
divided  into  three  broad  classes,  namely;  (1)  those  that  are 
general  and  essentially  territorial  in  character;    (2)   those 


258  COMBINATION    ORGANIZATIONS 

that  include  only  business  units  engaged  in  a  particular 
trade  or  industry;  and  (3)  those  that  have  some  special 
purpose  in  view. 

General  Commercial  Associations.  —  Among  the  general 
business  associations  of  the  United  States,  the  Chamber  of 
Commerce  of  the  state  of  New  York  is  said  to  be  the 
oldest,  dating  back  to  1768.  The  purpose  of  the  organi- 
zation is  stated  in  the  resolution  creating  it  as  follows: 
"  mercantile  societies  have  been  found  very  useful  in  trad- 
ing cities  for  promoting  and  encouraging  commerce,  sup- 
porting industry,  adjusting  disputes  relative  to  trade  and 
navigation,  and  procuring  such  laws  and  regulations  as 
may  be  found  necessary  for  the  benefit  of  trade  in  gen- 
eral. .  .  ."  It  has  since  widened  its  activities  and  gives 
attention  to  all  matters  of  local,  state  and  national  concern. 
In  most  of  our  states  there  now  are  similar  general  assoc- 
ciations. 

The  merchants  and  business  men  of  our  larger  cities 
also  have  formed  general  associations  patterned  after  the 
state  associations,  but  local  in  character.  New  York  City 
has  its  Merchants  Association;  Chicago  and  New  Orleans, 
their  Associations  of  Commerce;  Detroit,  its  Board  of 
Commerce;  and  among  others  Boston,  Cincinnati  Cleve- 
land, Los  Angeles,  Philadelphia,  Portland,  San  Francisco 
and  St.  Louis,  their  chambers  of  commerce.  A  great 
many  smaller  cities  and  towns  also  have  their  own  local 
associations  patterned  after  these. 

Since  about  1900  these  state  and  local  associations  have 
made  frequent  attempts  to  organize  a  national  chamber  of 
commerce.  The  first  attempts  met  with  little  success-  But 
in  1912,  Secretary  Nagel  of  the  Department  of  Commerce 
and  Labor,  at  the  suggestion  of  President  Taft  called  to- 
gether representatives  of  state  and  local  associations,  and 
out  of  this  meeting  sprang  the  Chamber  of  Commerce  of 
the  United  States  of  America.     The  by-laws  of  this  or- 


ASSOCIATIONS,    FEDERATIONS,    ETC.        259 

ganization  state  its  aims  to  be:  "  To  secure  cooperative 
action  in  advancing  the  common  purposes  of  its  members, 
uniformity  and  equality  in  business  usages  and  laws,  and 
proper  consideration  and  concentration  of  opinion  upon 
questions  affecting  financial,  commercial,  civic  and  in- 
dustrial interests  of  the  country  at  large."  In  the  follow- 
ing year  it  was  reported  to  have  had  a  membership  consist- 
ing of  over  600  commercial  organizations  and  over  1,700 
individuals.  The  vote  of  the  members  on  all  matters  ig 
usually  obtained  by  mail. 

Trade  and  Industrial  Associations.  —  However,  these 
general  associations  do  not  afford  the  business  man  all 
the  advantages  that  he  seeks.  Each  trade  and  industry  has 
its  own  special  problems  that  may  best  be  dealt  with 
through  special  associations.  Local  butchers,  grocers, 
druggists,  bankers,  etc.,  frequently  form  their  own  asso- 
ciations, as  also  do  manufacturers  of  steel,  automobiles 
and  other  commodities.  Thus,  we  find  in  this  country  the 
Philadelphia  Association  of  Retail  Druggists,  the  Califor- 
nia Fruit  Growers'  Association,  the  New  York  Tow  Boat 
Exchange,  the  Michigan  Salt  Association,  the  Southern 
Pine  Association  and  hosts  of  others.  But  in  many  trades 
and  industries  there  also  are  national  or  regional  combina- 
tions, such  as  the  National  Automobile  Chamber  of  Com- 
merce, the  American  Iron  and  Steel  Institute,  National 
Association  of  Window  Glass  Manufacturers,  American 
Association  of  Button  Manufacturers,  National  Wholesale 
Druggists'  Association,  National  Association  of  Retail 
Druggists  and  the  Copper  Producers'  Association. 

Special  Purpose  Associations.  —  It  is  often  found  desira- 
ble to  organize  associations  for  special  purposes.  In  this 
case  the  character  of  the  membership  resembles  that  of 
the  general  associations,  but  is  more  restricted.  The  most 
prominent  representatives  of  this  class  are  the  numerous 
foreign  trade  associations  that  have  shown  an  astonishing 


260  COMBINATION    ORGANIZATIONS 

development  since  the  close  of  the  World  War.  They 
are  represented  by  such  organizations  as  the  American 
Manufacturers  Export  Association,  the  Philadelphia  Com- 
mercial Museum,  the  Exporters'  and  Importers'  Associa- 
tion, the  Export  and  Import  Board  of  Trade  of  Baltimore, 
the  Foreign  Trade  Club  of  San  Francisco  and  the  National 
Foreign  Trade  Council  of  New  York.  Among  them  may 
also  be  included  the  numerous  American  chambers  of  com- 
merce established  in  foreign  countries.  They  are  to  be 
found  in  such  cities  as  London,  Berlin,  Paris,  Milan,  Naples, 
Brussels,  Shanghai,  Mexico  City  and  many  others.  Their 
chief  purpose  is  to  promote  friendly  foreign  trade  relations, 
to  develop  foreign  markets  and  to  suppress  questionable 
trade  practices. 

Business  Associations  in  Other  Countries.  —  Prior  to 
1914,  business  associations  of  the  type  under  consideration, 
had  perhaps  attained  a  greater  development  in  Germany 
than  in  any  other  country.  However,  European  business 
establishments  emerged  from  the  late  war  in  a  much  weak- 
ened condition  which  placed  them  temporarily  at  a  dis- 
advantage in  competing  against  the  strong  American  firms 
that  had  sprung  up.  As  a  result  a  general  reorganization 
involving  all  forms  of  combination  set  in,  and  in  most  of 
the  industrial  countries  of  Europe  strong  national  associa- 
tions of  business  men  were  formed.  In  England  arose,  in 
1916,  the  Federation  of  British  Industries,  which  in  four 
years  enrolled  no  less  than  1,300  members  including  some 
200  trade  associations.  It  is  reported  to  be  in  direct  or 
indirect  touch  with  over  20,000  British  manufacturers, 
covering  every  industry  in  the  country.  Its  governing 
board  consists  of  211  members  made  up  of  the  leading  men 
in  all  industries.  In  Germany,  in  1919,  the  Reichsverband 
der  Deutschen  Industrie  was  formed  by  consolidating  two 
prior  existing  organizations,  namely,  the  Zentral  Vcrbund 
der  Deutschen  Industricllen  and  the  Bund  der  Industricllen. 


ASSOCIATIONS,    FEDERATIONS,    ETC.        261 

It  includes  in  its  membership  several  hundred  associations 
representing  about  50,000  firms,  either  directly  or  through 
affiliated  associations.  Its  purpose  is  stated  to  be  to  ad- 
vise concerning  the  fulfillment  of  the  economic  provisions 
of  the  peace  treaty,  to  study  and  recommend  tax  policies 
and  to  aid  in  promoting  sound  economic  policies-  In 
France,  in  1915,  L'Association  National  d'Expansion 
Economique  was  formed  under  the  auspices  of  the  Paris 
Chamber  of  Commerce.  It  comprises  most  of  the  import- 
ant manufacturers,  trade  associations,  insurance,  banking, 
shipping  and  railway  interests  of  France. 

One  of  tlie  latest  developments  in  this  type  of  combina- 
tion organization  is  the  International  Chamber  of  Com- 
merce. This  association  was  formed  in  1920  with  its 
official  seat  at  Paris.  It  is  intended  to  serve  as  a  clearing 
house  for  international  business  information;  to  consider 
laws  affecting  commerce;  to  suggest  changes  in  the  enact- 
ment of  new  measures  that  will  improve  conditions;  to 
affect  reforms  on  its  own  initiative  in  business  customs 
and  practices  to  bring  better  results;  and  to  gather  and 
distribute  information  necessary  to  the  better  conduct  of 
commerce  and  to  suggest  improvements  of  the  existing 
system  to  governments. 

Tendency  to  Federate  for  Purpose  of  Control.  —  There 
has  always  been  a  marked  tendency  among  the  trade  and 
industrial  associations  to  inaugurate  schemes  for  the  con- 
trol of  prices,  production  and  distribution  of  the  com- 
modities in  which  their  members  deal.  To  accomplish 
this  end  some  have  frequently  availed  themselves  of  the 
Use  of  factor's  agreements,  while  others  have  strengthened 
their  organization  so  that  this  partook  more  of  the  char- 
acter of  a  federation,  in  so  far  as  it  sought  to  gain  power  of 
control  over  certain  aspects  of  its  members'  business. 
These  practices  have  caused  many  of  them  to  be  called 
before  the  courts  charged  with  violating  the  provisions  of 
the  federal  Anti-Trust  Laws  and  similar  state  statutes. 


262  COMBINATION    ORGANIZATIONS 

B.    Factors'  Agreements  as  Instruments  of 
Combination 

Factors'  agreements  may  be  defined  as  contractual 
arrangements  whereby  one  of  the  contracting  parties  se- 
cures a  limited  control  over  the  freedom  of  action  of  the 
other  in  business  matters.  Usually,  they  aim  to  diminish, 
moderate  or  prevent  competition  in  the  sellers'  line  of 
commodities.  The  provisions  of  the  Sherman  Act,  declar- 
ing agreements  in  restraint  of  trade  to  be  unlawful,  are 
aimed  at  them,  and  the  Clayton  Act  of  1914  gives  them 
even  greater  attention  under  provisions  against  the  use  of 
unfair  methods  of  competition. 

A  careful  study  of  agreements  of  this  kind  brought  to 
light  through  court  proceedings,  shows  that  their  variety  is 
very  great.^  However,  for  sake  of  convenience  they  may 
readily  be  classified  into  three  kinds,  namely;  (1)  condi- 
tional requirements;  (2)  exclusive  arrangements;  and  (3) 
preferential  arrangements  with  or  without  rebates. 

Conditional  Requirements.  —  This  type  of  factors' 
agreement  is  frequently  employed  by  manufacturers  or 
dealers  who  have  a  more  or  less  complete  control  over  cer- 
tain kinds  of  commodities,  to  bind  the  purchaser  of  these 
commodities  to  buy  only  from  the  seller  certain  other 
commodities  over  which  the  latter  has  no  such  control. 
Thus,  manufacturers  of  patented  articles  and  machines 
often  insert  in  their  contract  of  sale  that  the  buyer,  or 
dealer  shall  purchase  certain  non-patented  articles  or 
those  on  which  the  patent  monopoly  has  expired,  only  from 
the  seller  of  the  patented  article.  Others  again  require 
the  buyer  to  handle  new  lines  of  commodities  as  a  condition 
of  continuing  to  handle  old  lines,  or  to  purchase  certain 
commodities  as  a  condition  of  the  purchase  of  others. 

1  Specimens  of  such  agreements  may  be  found  in  Dr.  W.  H.  S, 
Stevens'  Industrial  C ovibinalions  and  Trusts.  See  also  Unfair 
Competition  by  the  same  author. 


ASSOCIATIONS,    FEDERATIONS,    ETC.        263 

For  example,  between  1906  and  1909  the  General  Electric 
Company  secured  from  the  German  owners  the  patents 
and  applications  covering  tungsten  and  tantalum  filament 
lamps.  The  demand  for  electric  lamps  in  this  country  was 
such  that  dealers  were  more  or  less  obliged  to  handle 
not  only  the  old  carbon  filament  lamp  but  also  the  two 
newer  types  above  mentioned.  Patents  covering  the  car- 
bon lamps  had  expired,  in  1894,  and  many  manufacturers 
had  lamps  of  this  kind  on  the  market-  Among  them  was 
the  General  Electric  Company.  Tliis  company  set  about 
securing  all  of  the  carbon  lamp  business.  Since  the  newer 
types  could  be  bought  only  from  it,  it  stipulated  in  its 
contracts  of  sale  that  purchasers  of  tungsten  and  tantalum 
lamps  must  also  buy  from  it  all  of  their  carbon  filament 
lamps.  The  United  States  Supreme  Court,  however,  de- 
clared these  contracts  to  be  an  unlawful  restraint  of  trade. 

The  "  full-line  forcing  "  —  a  practice  of  requiring  dealers 
to  order  new  lines  of  products  as  a  condition  to  retaining 
the  agency  for  some  brand  of  the  company's  harvesting 
machines  —  employed  by  the  International  Harvester 
Company  is  another  such  practice  discountenanced  by  the 
courts.  The  United  Shoe  Machinery  Company,  the 
Motion  Picture  Patents  Company  and  the  American  Coal 
Products  Company  also  made  extensive  use  of  factors' 
agreements  of  this  type. 

Exclusive  Arrangements.  —  Professor  W.  H.  S.  Stevens 
defines  exclusive  arrangements  as  "  arrangements  which 
require  that  certain  dealings  or  transactions  shall  be  con- 
fined exclusively  to  a  specified  organization  or  organiza- 
tions." ~  They  are  frequently  included  in  contracts  in- 
volving conditional  requirements. 

Three  types  of  exclusive  arrangements  have  been  com- 
monly used,  namely;  those  that  require  (1)  exclusive  use; 
(2)  exclusive  sale;  and  (3)  exclusive  purchase  of  the  com- 
2  W.  H.  S.  Stevens,  Unfair  Competition,  p.  77. 


264  COMBINATION    ORGANIZATIONS 

modity  in  question.  For  example,  the  .United  Shoe  Ma- 
chinery Company  stipulated  in  its  contracts,  that  the 
lessors  of  certain  of  its  patented  machines  should  use  them 
only  in  connection  with  nails  and  other  commodities  sold 
by  that  company  for  the  manufacture  of  boots,  shoes  and 
footwear.  The  American  Tobacco  Company  provided  in 
its  contracts  with  dealers,  that  the  exclusive  sale  by  them 
of  its  products  would  entitle  the  dealers  to  a  rebate  of  7 
per  cent,  whereas  otherwise  the  rebate  would  be  but  2  per 
cent.  But  in  many  cases  they  completely  cut  off  the 
supply  of  their  cigarettes  to  dealers  who  did  not  handle 
the  American  Tobacco  Company's  products  exclusively. 
The  National  Wall  Paper  Company  and  the  Eastman 
Kodak  Company  usually  stipulated  in  their  contracts  with 
dealers,  that  the  latter  bound  themselves  to  purchase  only 
the  product  of  the  respective  companies. 

Preferential  Arrangements.  —  Provisions  in  contracts 
of  sale,  whereby  dealers  or  users  of  the  commodity  are  given 
rebates  and  other  special  reductions  in  the  purchase  price 
of  the  commodity  for  the  purpose  of  suppressing  competi- 
tion, have  been  very  common.  These  are  now  usually 
called  preferential  arrangements-  The  records  of  the  fed- 
eral courts  give  many  examples  where  they  were  used  by 
railroads,  steamship  companies  and  industrials.  They 
helped  build  up  the  Standard  Oil  and  the  tobacco  monop- 
olies and  numerous  others.  In  the  case  of  the  Standard 
Oil  Trust  they  took  the  form  of  rebates  given  to  that  com- 
bine by  railroads  on  the  freight  charges  for  oil  transported, 
an  advantage  that  other  oil  companies  did  not  enjoy.  The 
American  Tobacco  Company  used  a  similar  practice  in 
connection  with  exclusive  arrangements  to  build  up  a  semi- 
independent  distributive  organization  over  which  it  might 
exercise  control. 

All  of  these  three  types  of  factors'  agreements  serve  at 
their   best   as   a   very    weak   form   of   combination,   since 


ASSOCIATIONS,    FEDERATIONS,    ETC.        265 

there  is  in  most  cases  no  legal  means  of  forcing  compliance 
with  them.  While  they  still  crop  out  occasionally,  they 
are  nevertheless  becoming  less  common,  and  are  gradually 
giving  way  to  ownership  combinations  built  up  on  the 
integration  principle. 

C.    Federations 

The  federation,  as  before  stated,  differs  from  the  associa- 
tion and  the  factors'  agreement  in  that  it  provides  in  the 
agreement  creating  it  for  a  central  body  which  shall  exer- 
cise some  measure  of  control  over  the  business  of  the  com- 
bining units.  This  power  oi  control  usually  hinges  upon 
one  or  more  of  three  factors,  namely;  (1)  the  supply  of 
the  commodity  in  question;  (2)  the  market  or  demand  for 
it;  and  (3)  the  price  at  which  it  is  to  be  sold.  It  may  or 
may  not  be  accompanied  by  penalties  to  be  imposed  upon 
recalcitrant  members.  The  chief  aim  and  purpose  of  these 
combinations  is  the  suppression  of  competition.  In  the 
United  States  they  are  called  pools,  while  in  Europe  the 
name  kartell,  or  syndicate  is  applied  to  them. 

Federations  ordinarily  are  combinations  of  the  horizontal 
type,  including  in  their  membership  few  or  many  establish- 
ments in  like  stages  of  production  or  distribution.  Occa- 
sionally, however,  we  do  find  federations  of  manufacturers, 
wholesalers  and  retailers,  respectively,  bound  together 
through  factors'  agreements  into  a  gigantic  combination 
that  has  a  complete  control  of  the  entire  trade  in  a  given 
type  of  commodity.  As  a  matter  of  fact,  there  seems  to 
be  a  marked  tendency  on  the  part  of  these  combinations 
to  extend  their  control  as  far  as  possible.  In  the  United 
States,  this  soon  brings  them  before  the  courts  as  violators 
of  the  anti-trust  laws.  In  Europe,  on  the  other  hand,  they 
enjoy  quite  generally  the  sanction  of  the  law,  and  are  fre- 
quently even  fostered  and  encouraged  by  the  governments. 

The  American  Pools.  —  Pools  became  prominent  in  the 


266  COMBINATION    ORGANIZATIONS 

United  States  during  tlie  decade  following  tlie  year  1870. 
At  first  they  were  successfully  used  by  the  railroad  com- 
panies, who  employed  all  three  of  the  basic  elements  above 
mentioned  in  organizing  them.  Somewhat  later,  the  in- 
dustrial and  trade  branches  of  business  took  up  this  form 
of  organization.  It  was  early  recognized  that  they  not 
only  sought  to  restrict  competition,  but  that  they  actually 
did  so.  Thus,  when  the  Interstate  Commerce  Commission 
Act  (1887)  and  the  Sherman  Anti-Trust  Act  (1890)  were 
passed,  they  included  provisions  seeking  to  suppress  pools 
that  substantially  reduced  competition  and  unduly  re- 
strained trade  between  the  states  or  with  foreign  nations. 
This  resulted  in  the  development  of  new  forms  that  it  was 
hoped  would,  at  least  technically,  be  outside  the  pale  of 
these  laws.  Nevertheless,  it  remains  a  fact  that  they  seek 
to  suppress  competition;  and  one  need  not  look  far  in  the 
annals  of  court  decisions  under  our  anti-trust  legislation 
to  find  many  of  them  that  have  been  adjudged  to  violate 
these  laws. 

A  careful  study  of  the  documentary  evidence  contained 
in  these  decisions,  and  of  specimens  of  pool  agreements 
disclosed  in  reports  of  Congressional  and  other  committees, 
enables  us  to  classify  American  pools  according  to  the 
means  used  to  accomplish  the  end  in  view.  From  this 
standpoint  we  recognize  a  number  of  distinct  methods  that 
have  been  used  in  organizing  pools.  However,  several  of 
these  may  be  employed  in  a  single  pool.  They  are  as 
as  follows: 

1.  Percentage  Division  of  Business.  —  The  total  busi- 
ness done  by  all  those  in  the  pool  is  allotted  to  the  various 
members  usually  in  proportion  to  their  productive  capacity, 
and  these  agree  to  stay  within  their  limits  or  pay  a  penalty 
to  the  pool  on  exceeding  their  percentage.  Bonuses  are 
commonly  paid  to  those  who  produce  less  than  their 
allotted  percentage.     The  percentage  contributed  by  each 


ASSOCIATIONS,    FEDERATIONS,    ETC.        267 

firm  to  the  total  production  of  the  preceding  year  is  taken 
as  a  basis.  The  scheme  has  no  legal  sanction,  and  is  not 
enforceable  at  law.  Nevertheless,  pools  of  this  type  have 
been  fairly  common  in  the  steel  industry,  for  steel  rails, 
structural  steel,  wire  nails,  etc.,  in  the  hardware  business 
in  the  manufacture  of  saws,  screws,  shovels,  door  hangers, 
etc.,  in  the  distilling  and  other  industries.  The  tendency 
of  the  stronger  firms  to  crowd  out  the  weaker  ones  who 
have  no  protection  at  law  under  the  agreement,  tends  to 
cause  frequent  disruptions  of  these  pools. 

An  excellent  example  of  this  type  is  the  Structural  Steel 
Association  of  1897.^  There  were  ten  members  in  this 
association,  each  of  whom  was  permitted  to  take  up  to  a 
certain  per  cent  of  the  total  monthly  sales  of  structural 
steel.  The  apportionment  of  business  in  percentage  was 
as  follows: 

Carnegie  Steel  Co.  (Ltd.)    49% 

Jones    &    Laughlin    (Ltd.)     12% 

A  &  P.  Roberts  Co llVa 

Passaic  Rolling  Mills  Co 6 

Phoenix  Lon  Co. 5 

Cambria  Iron   Co 5 

Universal  Construction  Co 4^/4 

Pottsville  Iron  &  Steel  Co 3 

Cleveland  Rolling  Mill  Co 3 

In  addition,  it  was  provided  that  the  New  Jersey  Steel  & 
Iron  Company  should  receive  $5,000  per  year  to  remain 
inoperative  in  the  manufacture  of  structural  steel. 
Monthly  statements  were  to  be  rendered  to  the  association's 
"  commissioner  "  who  was  to  assess  members  one-half  a  cent 
per  pound  for  excess  sold  and  to  pay  a  bonus  of  a  like 
amount  to  those  who  sold  less  than  their  quota. 

The  agreements  of  the  "  Steel  Rail  Pool,"  of  1887,  and  of 
the  Tin  Plate  Association,  of  1900,  contained  similar 
provisions.* 

^  For  a  copy  of  the  agreement  see  Stevens,  Industrial  Combina- 
tions and  Trusts,  pp.  211-219. 
*  Ibid.  pp.  69-71  and  219-225  respectively. 


268  COMBINATION    ORGANIZATIONS 

The  Brewers'  Association,  embracing  five  brewing  com- 
panies of  the  city  of  Washington,  provided  in  its  agree- 
ment not  only  for  an  apportionment  of  the  business,  but 
coupled  this  with  a  price-fixing  scheme  and  a  prohibition 
against  any  customer  of  a  member  selling  to  the  customers 
of  another.^ 

2.  Curtailment  of  Output.  —  These  pools  seek  to  reduce 
competition  by  curtailing  the  output,  either  uniformly  or 
otherwise,  of  the  several  members.  Thus,  in  1881,  when 
the  western  distillers  found  that  the  prices  they  were  get- 
ting for  their  product  were  really  below  the  cost  of  produc- 
tion, they  decided  to  limit  the  quantity  of  whiskey  pro- 
duced. They  formed  the  "  Western  Export  Association," 
the  officers  of  which  were  authorized  to  levy  a  monthly 
assessment  on  each  distiller  running  his  plant.  This 
assessment  was  to  be  proportionate  to  the  amount  of  grain 
used  in  the  manufacture  of  spirits,  and  was  to  be  used  to 
facilitate  the  exportation  of  the  surplus  product.  The  pool 
broke  up  the  following  year  because  some  members  failed 
to  pay  their  assessments,  but  it  was  reconstituted  a  few 
months  later.  From  1883  until  1887  the  pool  continued  for 
a  year  at  a  time,  with  suspensions  as  often  as  once  a  year. 
Most  frequently  it  provided  for  limiting  the  output  of  the 
distilleries.  Thus,  in  1884,  it  was  stipulated  that  "  only 
28  per  cent  of  the  full  capacity  shall  be  operated,  and  no 
stocking  up  beyond  this  amount  allowed  under  any  circum- 
stances." In  1887,  it  was  definitely  supplanted  by  a  trust 
form  of  organization.**  Another  excellent  example  is  the 
Washington  Red-Cedar  Shingle  Association  which  com- 
bined this  feature  with  regulation  of  prices.  It  was  formed 
in  1889,  and  was  empowered  to  issue  from  time  to  time  a 
minimum  price  below  which  all  members  agreed  not  to  sell 

^  Leonard  v.  Ahnrr-Drnry  Brimnng   Co.,  25  Appeal    (D.  C.)    161. 
"  An  Gxcollent  dosrription   of  this  pool   and  the   trust   that  sup- 
planted it  will  be  found  in  Ripley's  Trusts,  Pools  and  Corporations. 


ASSOCIATIONS,    FEDERATIONS,    ETC.        269 

shingles  to  dealers  and  wholesalers,  to  establish  a  system 
of  prices  at  which  shingles  must  be  sold  to  retail  dealers, 
and  to  order  the  closing  dow^n  of  all  mills,  and  to  take  other 
necessary  steps  to  curtail  the  output  of  Washington  red- 
cedar  shingles  when  this  appeared  to  be  necessary.'^ 

On  the  whole,  this  type  of  pool  is  too  simple.  It  is  un- 
enforceable at  law  and  the  larger  members  tend  to  exceed 
their  allotment  of  production. 

3.  Territorial  Division  of  Market.  —  By  this  method  the 
territorial  market  supplied  by  the  members  of  the  pool  is 
broken  up,  and  a  part  allocated  to  each  member.  Thus, 
the  "  Fundamental  Agreement  "  of  the  American  powder 
manufacturers  (1889)  provided  not  only  for  a  division  of 
territory  among  the  members,  but  also  for  yearly  allot- 
ments of  the  number  of  kegs  of  each  variety  of  powder 
that  each  concern  should  be  permitted  to  make.  The 
agreement  was  made  enforceable  through  a  "  Board  of 
Trade."  In  1897,  these  American  powder  manufacturers 
entered  into  a  similar  pool  with  the  Vereinigte  Koln- 
Rottweiler  Pulverfabriken,  of  Germany,  and  the  Nobel 
Dynamite  Trust,  of  London,  whereby  the  three  divided  the 
world's  market  area  into  exclusive  territories.^  In  1902, 
two  similar  international  agreements  were  entered  into  be- 
tween six  American  tobacco  companies  and  the  Imperial 
Tobacco  Company  of  Great  Britain  whereby  the  United 
States,  its  possessions  and  Cuba  became  the  exclusive 
market  of  the  American  companies,  while  the  United  King- 
dom fell  to  the  Imperial  Company,  and  the  rest  of  the 
world  was  to  be  supplied  by  the  British-American  Tobacco 
Company  which  was  controlled  by  the  contracting  parties.^ 
A  similar,  but  much  more  complicated  division  of  market 
was  provided  for  in  the  agreement  creating  the  famous 
Addy stone    Pipe    Pool-    The   United    Coal    Tar    Refining 

7  Gibbs  V.  McNeelcy  et  at.,  118  Fed.  120. 

*  These   agreements  have  been  published   in   Stevens,  Industrial 
Combinations  and  Trusts,  pp.  176-183  and  195-205. 
9  Ibid.  pp.  161-176. 


270  COMBINATION    ORGANIZATIONS 

Company,  the  American  express  companies,  and  the  rail- 
roads did  the  same  thing.  It  is  also  a  common  practice 
among  the  European  kartells  and  syndicates. 

4.  Centralized  or  Joint  Sales  Plan.  —  Under  this  plan 
the  combining  concerns  agree  to  form  an  association  or 
company  which  shall  have  the  exclusive  right  to  sell  all, 
or  at  least  a  large  part,  of  their  total  product.  In  most 
cases  the  central  organization  is  an  incorporated  company. 
They  are  common  in  the  marketing  of  fruit,  tobacco  and 
produce,  coal  and  metals,  and  are  also  used  to  secure 
greater  competitive  power  when  selling  in  foreign  markets. 

One  of  the  earliest  of  this  type  of  pool  was  the  Michigan 
Salt  Association,  organized  by  the  salt  producers  of  the 
Saginaw  Bay  District  of  Michigan,  in  1876  for  a  term  of 
five  years  and  renewed  for  a  like  term  in  1881.  It  placed  no 
restriction,  whatever,  upon  the  quantity  of  salt  produced, 
but  provided  that  "  each  and  every  contractor  shall  manu- 
facture salt  for  this  association  on  the  terms  and  conditions 
as  follows:  That  he  will  make  salt  solely  on  the  associa- 
tion's account,  of  the  best  quality  of  the  kind  manufactured 
by  him,  according  to  the  conditions  of  his  lease."  Salt 
might,  however,  be  manufactured  for  other  than  association 
account  by  paying  ten  cents  per  barrel  to  the  association. 
In  this  way  it  succeeded  in  preventing  competition  among 
the  Michigan  manufacturers  and  in  stabilizing  prices. 
In  1899,  it  became  an  easy  victim  of  promoters  who  took 
its  members  into  the  National  Salt  Company  of  New 
Jersey.  In  1901,  the  International  Salt  Company  was 
formed  to  combine  the  National  and  other  American  and 
foreign  companies;  but  it  was  so  highly  over-capitalized 
that  it  became  insolvent  in  1902.  Its  great  weakness  lay 
in  the  fact  that  it  could  not  successfully  keep  down  com- 
petition. A  similar  pool  was'the  Naval  Stores  Pool  with 
headquarters  at  Savannah,  Georgia.^" 

10  The  former  organization  is  well  described  in  Ripley's  Trusts, 
Pnnls  and  Corporation.s  while  the  agreement  for  the  latter  may  be 
found  in  Stevens,  Industrial  Combinations  and  Trusts. 


ASSOCIATIONS,    FEDERATIONS,    ETC.       271 

In  1908,  the  tobacco  growers  of  the  Burley  District  of 
Kentucky  found  it  necessary  to  protect  themselves  against 
the  centralized  purchasing  methods  employed  by  the 
American  Tobacco  Company.  They  formed  the  Burley 
Tobacco  Growers'  Association  through  which  the  several 
hundred  members  were  enabled  to  confront  the  single  pur- 
chasing agent  of  the  Tobacco  Company  with  a  single  sales 
agent.  The  association  gained  considerable  notoriety  be- 
cause of  its  practice  of  employing  "  night  riders  "  to  lay 
waste  the  crops  of  such  farmers  as  did  not  join  its  ranks. 
In  1920,  it  refused  to  sell  its  tobacco  at  the  prices  offered 
for  it.  Similar  organizations  are  the  California  Fruit 
Growers'  Association  and  the  Raisin  Growers'  Association 
of  California- 

Under  the  Webb  Act,  passed  by  Congress  in  1918,  legal 
sanction  was  given  to  combinations  of  corporations  engaged 
solely  in  "  trade  or  commerce  in  goods,  wares  or  merchan- 
dise exported,  or  in  the  course  of  being  exported  from  the 
United  States  or  any  territory  thereof  to  any  foreign 
nation."  Within  a  few  years,  more  than  a  hundred  such 
organizations  were  formed.  They  vary  in  form  from  loose 
combinations  to  well  organized  corporations.  An  example 
of  the  former  type  is  the  Textile  Alliance  Export  Associa- 
tion. Any  member  of  the  American  Association  of  Woolen 
and  Worsted  Manufacturers,  the  National  Association  of 
Woolen  Manufacturers,  the  National  Council  of  American 
Cotton  Manufacturers  and  the  Association  of  Cotton  Tex- 
tile Manufacturers  may  become  a  member  of  the  Export 
Association.  Membership  is  dependent  upon  the  owner- 
ship of  at  least  50  shares  of  the  7  per  cent  cumulative  non- 
voting stock  and  carries  w^ith  it  the  privilege  of  having  a 
full  line  of  goods  carried  by  the  association.  Control  is 
vested  in  the  four  associations  through  common  stock  of 
no  named  par  value  issued  to  them  at  a  nominal  price. 

An  example  of  the  second  class  is  the  Consolidated  Steel 


272  COMBINATION    ORGANIZATIONS 

Corporation  formed  by  ten  American  steel  companies,  ex- 
cluding the  United  States  Steel  Corporation  which  has  its 
own  export  company.  The  Consolidated's  capital  is 
$10,000,000  which  is  issued  to  members  in  proportion  to 
their  output  for  export  through  it.  The  stock  allotments 
are  held  in  trust  by  a  board  of  trustees  that  nominates 
the  list  from  which  the  board  of  directors  is  chosen  by  a 
majority  of  the  stock  interests.  The  stock  allotments  are 
readjusted  annually  on  the  basis  of  exportations  for  the 
year. 

5.  Central  Purchase  of  Total  Supply  for  Resale,  — 
There  are  several  varieties  of  this  type  of  pool;  first,  those 
that  are  organized  by  fabricators  for  the  purchase  of  their 
raw  materials;  second,  those  organized  by  merchants  for 
the  joint  purchase  of  merchandise  for  re-sale,  and  third, 
the  so-called  "  valorization  "  arrangements. 

Thus,  in  a  case  brought  against  the  National  Window 
Glass  Jobbers'  Association,  it  was  shown  that  this  associa- 
tion was  a  corporation  formed  by  75  per  cent  of  the  window 
glass  jobbers  and  dealers  in  the  United  States,  and  that 
they  controlled  it  through  stock  ownership.  This  so-called 
"  association  "  then  contracted  with  the  American  Window 
Glass  Company  to  take  a  large  part  of  the  latter's  product, 
and  to  sell  the  glass  at  predetermined  prices  through  its 
own  stockholders.  The  parties  to  these  agreements 
pledged  themselves  to  buy  from  others  only  at  much  lower 
prices  than  they  paid  among  themselves  and  to  sell  to 
others  only  at  considerably  higher  prices." 

Numerous  attempts  have  been  made  to  organize  pools 
of  this  type  to  handle  the  total  supply  of  raw  material  of 
a  given  kind  such  as  cotton,  copper  and  coffee.  Unless 
they  provide  at  the  same  time  for  control  over  the  supply 
of  such  products,  they  invariably  fail.     This  arises  from 

11  Wheeler-Stengel  Co.  v.  National  Window  Glass  Jobbers'  Assn. 
(1907),   152  Fed.  864. 


ASSOCIATIONS,    FEDERATIONS,    ETC.        273 

the  fact  that  as  the  outside  supply  becomes  scarce  the 
price  will  rise,  and  the  inducement  to  increase  production 
will  be  greater.  Such  was  the  experience  of  John  Hays 
Hammond  when  he  attempted  to  corner  the  cotton  supply, 
and  also  of  the  French  Copper  Syndicate  which  carried 
several  banks  with  it  when  it  collapsed.  The  Brazilian 
Government's  coffee  valorization  plan  met  with  little  better 
success  for  similar  reasons.  In  1906  and  1907  over-produc- 
tion of  this  crop  was  making  itself  felt.  Ruin  faced  the  in- 
dustry. The  states  of  Sao  Paulo,  Minas  Geraes  and  Rio 
de  Janeiro  then  agreed  to  purchase  and  hold  for  better 
prices  enough  coffee  to  keep  out  of  the  market  all  but  a 
quantity  sufficient  to  supply  the  world  demand.  Subse- 
quently two  of  the  states  withdrew  leaving  Sao  Paulo  to 
handle  the  situation  alone.  This  state  then  borrowed 
$88,400,000  with  which  it  purchased  over  eight  million  bags 
of  coffee,  but  even  the  withdrawal  of  this  amount  did  not 
raise  the  price,  and  with  a  new  crop  maturing  the  state 
faced  bankruptcy.  It  eventually  succeeded  in  raising 
sufficient  money  through  foreign  loans  to  tide  it  over  but 
was  forced  to  abandon  the  valorization  plan.  A  factor 
contributing  to  the  collapse  was  the  decision  by  the  United 
States  courts  declaring  this  to  be  a  monopoly  in  restraint 
of  trade,  thus  interfering  with  its  operations  in  the 
American  market. 

6.  Price  Fixing  Pools.  —  This  type  of  pool  is  quite 
common.  One  of  their  outstanding  characteristics  is  the 
extensiveness  of  these  organizations.  It  is  this  feature  that 
frequently  brings  them  before  the  courts  as  violators  of 
the  anti-trust  acts,  and  that  has  resulted  in  many  a  court 
decision  declaring  them  to  be  unlawful  combinations. 
One  of  the  most  extensive  of  this  type  was  the  Proprietary 
Drug  Pool,  brought  to  light  in  1906  in  a  suit  before  the 
United  States  Circuit  Court  for  the  Eastern  District  of 
Pennsylvania.^-     It  involved   all   of  the  members  of  (1) 

12  Loder  v.  Jayne  et  aL,  142  Fed.  1010. 


274!  COMBINATION    ORGANIZATIONS 

the  Proprietary  Association  of  America  composed  of  90  per 
cent  of  all  manufacturers  and  proprietors  of  patent  and 
proprietary  medicines  within  the  United  States;  (2)  the 
National  Wholesale  Druggists'  Association,  an  unincorpor- 
ated association  composed  of  about  95  per  cent  of  the 
wholesale  druggists  of  this  country;  and  (3)  the  National 
Association  of  Retail  Druggists,  an  unincorporated  associa- 
tion, with  headquarters  at  Chicago,  composed  of  local 
associations  of  retail  druggists  embracing  about  90  per  cent 
of  those  to  be  found  in  the  cities  and  towns  of  the  United 
States.  The  operations  of  this  series  of  combinations 
united  in  the  form  of  a  pool  are  succinctly  described  by  the 
court  as  follows: 

*'  The  burden  of  proving  the  existence  of  this  agreement, 
contract,  combination,  and  conspiracy,  and  that  the  de- 
fendants were  engaged  and  took  part  in  it,  was  upon  the 
plaintiff,  and  for  that  purpose  evidence,  which  was  un- 
contradicted, was  offered  to  prove  that  the  National 
Association  of  Retail  Druggists  had  its  central  office  in 
Chicago,  and  received  financial  support  from  all  the  other 
associations  and  many  of  the  members  belonging  to  them; 
that  from  this  central  point  organizers  were  sent  out  for 
the  purpose  of  bringing  the  local  retail  dealers  into  associa- 
tions, and,  as  a  result,  Philadelphia  retailers  were  organized 
into  an  incorporated  association  known  as  the  Philadelphia 
Association  of  Retail  Druggists.  In  accordance  with  the 
plans  suggested  by  the  organizers  sent  from  Chicago,  the 
Philadelphia  retail  druggists  working  with  the  organizers 
secured  a  consensus  of  opinion  of  the  retailers  here  from 
which  they  fixed  the  minimum  rate  at  which  drugs  should 
be  sold  at  retail  by  the  retail  druggists  in  Philadelphia  and 
vicinity.  All  the  retail  dealers  were  then  notified  of  this 
minimum  rate  and  in  case  the  retailer  cut  below  the  price 
so  fixed  his  name  with  this  information,  was  sent  to  the 
National  Association  of  Retail  Druggists  at  Chicago,  and 


ASSOCIATIONS,    FEDERATIONS,    ETC.        275 

the  secretary,  Mr.  Wooten,  then  placed  the  name  of  this 
retail  druggist  upon  what  was  known  as  an  '  aggressive 
cutter's '  list,  and  this  aggressive  cutter's  list,  with  his 
name  thereon,  w^as  sent  to  all  proprietors,  members  of  the 
Proprietary  Association  of  America,  and  all  the  whole- 
salers, members  of  the  National  Wholesale  Druggists' 
Association,  with  the  request  that  they  cease  selling  any 
drugs  whatever  to  such  an  aggressive  cutter;  and  it  was 
further  established,  in  case  any  proprietor  or  wholesaler, 
after  receiving  this  notice  from  the  Secretary  of  the 
National  Association  of  Retail  Druggists,  failed  to  obey 
and  cease  selling  to  such  an  aggressive  cutter,  this  informa- 
tion of  his  failure  to  obey  also  found  its  way  to  the  secre- 
tary of  the  National  Association  of  Retail  Druggists  and 
such  disobedient  proprietor  or  wholesaler  was  disciplined 
by  being  put  on  what  was  designated  as  a  '  pink  slip,'  and 
his  name  was  sent  to  all  retailers  throughout  the  United 
States  wdth  the  information  that  he  had  been  selling  to 
aggressive  cutters,  and  the  request  made  to  the  retailers 
throughout  the  country  to  cease  making  any  further  pur- 
chases from  such  delinquent  wholesaler  or  proprietor." 

A  similar  pool  was  disclosed  through  the  suit  brought 
by  the  Bobbs-Merrill  Company  against  one  of  the  pro- 
prietors of  R.  H.  Macey  and  Company  of  New  York  City.^'' 
In  this  case  the  American  Publishers'  Association  and  the 
American  Booksellers'  Association  each  representing  about 
90  per  cent  of  their  respective  business  fields  entered  into 
mutual  agreements  to  sell  books  only  at  such  prices  as  w-ere 
agreed  upon.  The  court  held  the  agreement  to  be  invalid 
at  law. 

Railroads  also  have  used  this  form  of  pool  to  institute 
uniform  freight  rates-  These  rate  agreements  were  some 
of  the  first  to  be  attacked  by  the  government  under  the 
Sherman  Act.  The  first  of  these  pools  was  the  Trans- 
it Bobbs-Mcrrill  Co.  v.  Strauss  ct  al,  139  Fed.  155. 


276  COMBINATION    ORGANIZATIONS 

Missouri  Freight  Association,  founded  in  1889  by  some  six> 
teen  railway  companies  operating  throughout  the  territory 
lying  between  the  Missouri  River  and  the  Pacific  Coast, 
The  agreement  is  described  as  ''  a  contract  between  railroad 
companies  forming  the  association  to  establish  and  main- 
tain such  rates,  rules  and  regulations  on  freight  traffic  be- 
tween competitive  points  as  a  committee  of  their  choosing 
shall  recommend  as  reasonable."  It  provided  for  monthly 
meetings  composed  of  one  representative  of  each  company. 
These  were  vested  with  power  to  set  the  rates.  Each  com- 
pany was  required  to  give  five  days'  notice  before  a 
monthly  meeting  if  it  desired  a  change  of  rates.  If  voted 
down,  it  was  to  give  ten  days'  notice  before  putting  its 
notified  rate  into  effect.^* 

The  railroad  companies  in  the  northeastern  part  of  the 
United  States  attempted  the  same  type  of  pooling  arrange- 
ment through  the  Joint  Traffic  Association  which  was  or- 
ganized in  1896. 

7.  Patent  Pools.  —  Companies  owning  patents  under 
which  certain  commodities  were  manufactured  have  fre- 
quently pooled  these  patents,  placing  the  ownership  or 
control  of  the  patents  in  a  corporation  which  then  gave  a 
license  or  right  to  manufacture  under  all  of  the  controlled 
patents.  Such  an  organization  was  the  National  Harrow 
Company.^^  This  company  was  formed  to  take  over 
patents  under  which  ninety  per  cent  of  the  spring-tooth 
harrows  produced  in  this  country  were  manufactured.  The 
former  owners  then  were  given  licenses  under  which  they 
might  manufacture  spring-tooth  harrows  provided  that 
they  did  not  sell  their  product  at  lower  prices  or  on  more 
favorable  terms  than  were  stipulated  in  the  license  agree- 
ment. 

1*  United     States     v.     Trans-Missouri     Freight     Association,     85 
Fed.  59. 
15  National  Harrow  Co  v.  Hench  et  al.,  83  Fed.  36. 


ASSOCIATIONS,    FEDERATIONS,    ETC.       211 

The  licensees  were  the  sole  stockholders  of  the  National 
Harrow  Company.  The  Indiana  Manufacturing  Company 
was  the  key  unit  in  a  similar  pool.  This  company  con- 
trolled twenty-one  American  and  two  Canadian  patents 
and  licensed  its  stockholders  to  manufacture  pneumatic 
straw  stackers  and  threshing  machines  under  them.  It 
also  stipulated  sale  under  uniform  prices.^® 

8.  Open  Price  Pools.  —  This  type  of  a  pool  is  said  to  be 
the  invention  of  Mr.  A.  J.  Eddy,  a  Chicago  lawyer,  who 
defines  an  open  price  as  "  a  price  that  is  open  and  above 
board,  that  is  known  both  to  competitors  and  customers, 
that  is  marked  wherever  practicable  in  plain  figures  on 
every  article  produced,  that  is  accurately  printed  in  every 
price  list  issued  —  a  price  about  which  there  is  no  secrecy, 
no  evasions,  no  preferences."  "  He  holds  that  the  insta- 
bility and  disorganization  of  business  are  due  to  ignorance 
or  misinformation  as  to  actual  market  conditions,  cost  of 
manufacture  and  marketing  methods,  and  that  cooperation 
accomplished  by  open  prices  is  the  remedy.  To  this  end 
he  has  been  instrumental  in  causing  scores  of  open  price 
associations  to  be  formed.  They  exist  today  in  the  cotton 
textile,  woolen,  lumber,  iron  and  steel,  leather,  milling  and 
numerous  other  industries. 

Each  member  of  the  association  sends  to  the  secretary 
a  report  covering  his  sales,  prices  and  terms.  These  are 
then  taken  up  at  the  regular  meeting,  which  may  be 
monthly  or  oftener,  and  deviations  from  the  average  are 
fully  discussed.  In  this  way  it  is  hoped  to  convince  a 
"  price  cutter  "  of  the  error  of  his  ways  and  to  bring  him 
up  to  the  general  average.  The  associations  are  cautioned 
against  discussion  of  future  prices  lest  they  run  counter 
to  the  Sherman  Act.     Nevertheless,  it  has  been  brought 

^6  See  Indiana  Manufacturing  Compaiiy  v.  J.  I.  Case   Threshing 
Machine  Co.,  148  Fed.  21. 
1^  A.  J.  Eddy:   The  New  Competition,  p.  110. 


278  COMBINATION    ORGANIZATIONS 

out  through  court  cases  and  hearings  before  legisLativc 
committees,"  that  the  urge  to  agree  on  future  prices  and 
to  cause  the  average  to  creep  up  through  one  means  or  an- 
other is  too  strong  to  be  resisted.  Such  for  example, 
was  the  case  with  the  Yellow  Pine  Association,  the 
Steel  Erectors'  Association  and  the  Portland  Cement 
Association.^^ 

The  famous  "  Gary  Dinners  "  of  the  members  of  the 
American  Iron  and  Steel  Institute  constituted  a  similar 
type  of  pool.  The  steel  masters  would  meet  at  dinner  at 
the  invitation  of  Judge  Gary,  usually  in  New  York  City, 
and  there  they  would  discuss  prices  and  conditions  of  busi- 
ness in  the  steel  industry.  It  was  considered  to  be  a  viola- 
tion of  a  gentleman's  word  of  honor,  should  he  digress  in 
any  way  from  the  prices  and  percentage  of  capacity  of 
production  considered  to  be  most  desirable  for  the  welfare 
of  the  industry.  Everything  that  was  said  at  these  meet- 
ings was  usually  given  out  to  the  press  for  publication. 
The  plan  was  abandoned  when  it  became  apparent  that 
the  courts  considered  it  to  be  in  violation  of  the  Sherman 
Act.-° 

The   Kartell   or   Syndicate 

The  kartell  or  syndicate,  is  the  European  counterpart 
of  the  American  pool.  It  is  essentially  a  combination  of 
the  federation  type  formed  by  agreement  between  autono- 
mous establishments  that  delegate  to  the  kartell  control 
over  certain  aspects  of  their  business.  Such  agreements 
have  the  sanction  of  the  law,  by  virtue  of  which  they  are 

IS  See  reports  of  the  Lockwood  Committee  of  New  York  State 
Legislature,  1920-21. 

19  In  the  case  of  American  Column  &  Lumber  Co.,  et  al.  v. 
United  States,  decided  at  the  October  Term  (1921)  of  the  Supreme 
Court,  it  was  held  that  the  open  price  association  is  a  combination 
in  restraint  of  trade  under  the  Sherman  Act. 

-"  For  an  account  of  what  took  place  at  these  dinners  see 
Stevens.  Industrial  Combinations  and  Trusts. 


ASSOCIATIONS,    FEDERATIONS,    ETC.        279 

made  enforceable  in  the  courts  like  any  other  valid  con- 
tract, regardless  of  their  monopolistic  character.  In  this 
particular  they  differ  from  the  American  pool  which,  if  it 
can  be  shown  to  be  monopolistic  or  even  in  restraint  of 
trade,  is  unlawful  and  hence  unenforceable  at  law.  They 
are  further  strengthened  by  the  fact  that  the  governments 
of  such  countries  as  Belgium,  Germany,  Sweden,  Switzer- 
land and  others,  encourage  their  formation,  and  frequently 
even  themselves  become  members.  The  life-term  of  these 
agreements  is  most  frequently  five  or  ten  years,  at  the  ex- 
piration of  which  it  becomes  necessary  to  negotiate  a  new 
contract. 

The  purpose  of  kartells  is  to  bring  about  a  closer  cor- 
relation between  the  supply  of,  and  the  demand  for,  a  given 
commodity.  For  this  reason  they  are  usually  built  up 
about  a  particular  article  of  commerce.  Thus,  prior  to  the 
formation  of  the  German  Steel  Syndicate  (Stahlwerksver- 
band)  the  steel  plants  were  members  of  several  different 
kartells  concurrently,  embracing,  for  example,  rails,  struc- 
tural steel  and  billets,  respectively-  Beside  these  there 
existed  at  times  kartells  for  heavy  sheets,  light  sheets,  wire 
and  other  commodities.  In  the  glass  industry  there  are 
kartells  for  bottles,  mirror  glass,  and  other  such  special 
articles. 

The  greatest  obstacle  standing  in  the  way  of  kartelliza- 
tion  is  special  interest.  The  combining  units  are  not 
always  all  in  the  same  stage  of  technical  development. 
In  almost  every  branch  of  production  isolated  establish- 
ments that  produce  but  a  single  commodity  will  be  found 
to  exist  side  by  side  with  those  that  have  integrated  to 
such  a  degree  that  they  have  extended  the  variety  of  their 
products  almost  to  the  limit.  Even  today  one  still  finds 
in  the  steel  industry  unit  blast  furnaces,  sheet  mills,  hoop 
band  plants  and  rod  mills,  even  though  this  is  one  of  the 
most  highly  integrated  industries.    Where  such  conditions 


280  COMBINATION    ORGANIZATIONS 

persist  the  problem  of  reconciling  the  peculiar  interests  of 
some  with  the  general  interest  of  all  is  one  that  all  but 
defies  solution. 

In  view  of  these  obstacles,  Dr.  Heinrich  Mannstaedt^^ 
lays  down  the  following  rules  governing  the  formation  of 
kartells:  If  the  kartell  is  to  be  built  up  about  a  given  ar- 
ticle, this  article  will  be  the  more  susceptible  to  kartelliza- 
tion  the  less  of  individual  peculiarities  it  possesses,  and  the 
more  closely  it  corresponds  to  the  products  of  other  estab- 
lishments. From  this  it  follows  that  kartells  can  be 
formed  most  easily  in  those  branches  of  production  in 
which  competition  is  keenest  and  where  the  law  of  mass 
production  is  most  freely  applicable.  Because  of  the  wide- 
spread use  of  automatic  or  semi-automatic  machinery  in 
the  lower  stages  of  production,  these  must  suffer  most  from 
over-production  and  are  ready  candidates  for  kartellization. 
In  contrast  to  them,  those  branches  of  industry,  like  machine 
manufacture,  the  products  of  which  possess  great  indi- 
viduality, making  them  less  susceptible  to  irregularity  of 
production,  are  not  easily  kartellized.  Under  such  condi- 
tions the  kartell  must  be  organized  about  a  single  commod- 
ity selected  from  the  general  mass  of  products. 

Types  of  Kartells.  —  According  to  the  same  economist, 
a  study  of  German  kartells  shows  that  four  methods  are 
commonly  employed  to  make  them  effective.  A  single 
kartell,  however,  may  use  two  or  more  of  them  at  the  same 
time.  As  the  following  brief  description  will  show,  they 
differ  little  from  the  methods  used  by  our  own  pools. 

(1)  Agreement  on  sales  price  and  conditions  of  sale  was 
common  among  the  earlier  kartells  and  is  frequently  used 
even  at  the  present  time.  But  it  has  not  proved  very 
successful,  since  it  provides  no  means  whereby  production 
may   be   curtailed   to   prevent   an   over-supply.     For   this 

21  Heinrich  Mannstaedt,  Ursachcn  und  Zicle  des  Zusammen- 
schlusses  im  Gewerbe. 


ASSOCIATIONS,    FEDERATIONS,    ETC.       281 

reason  they  usually  break  up  when  a  general  slump  in 
prices  sets  in.  However,  there  are  exceptions,  notably  the 
Upper  Silesian  Coal  Syndicate  which  enjoyed  a  continuous 
existence  for  more  than  twenty-five  years-  This  may  be 
accounted  for  in  part  by  the  fact  that  it  embraced  only 
coal  that  was  shipped  by  rail  or  water  out  of  the  district, 
exempting  such  as  was  needed  to  supply  the  local  indus- 
tries. Besides,  the  number  of  members  was  small,  includ- 
ing but  fifteen  mines,  all  of  which  produced  a  very  uniform 
commodity  under  approximately  identical  conditions.  In 
other  districts  of  Germany,  as  for  instance  in  the  Rhine- 
land  and  Westphalia,  where  great  variations  exist  not  only 
in  the  method  of  mining  but  also  in  the  quality  of  product, 
the  pure  price  and  conditions  kartells  have  seldom  con- 
tinued for  a  long  period  of  years. 

(2)  Territorial  division  of  markets  has  in  many  cases 
supplanted,  and  in  others  supplemented  the  above  method. 
Under  this  method,  if  the  producing  establishments  are 
large,  each  has  a  monopoly  over  a  given  territory;  and  if 
they  are  relatively  numerous  and  small  a  given  territory  is 
usually  assigned  to  a  group  of  them.  In  the  latter  case  it 
is  customary  for  each  group  to  draw  up  a  supplementary 
agreement  to  govern  the  operations  of  its  several  members. 
The  market  area  is  ordinarily  delimited  by  freight  charges. 

(3)  Pooling  o\f  profits  has  also  been  tried  with  some  suc- 
cess. To  make  this  operative  two  prices  are  agreed  upon, 
namely  a  basic  price  and  a  minimum  sales  price.  The 
basic  price  approximates  the  cost  of  production  and  may 
vary  from  establishment  to  establishment.  Each  member 
then  pays  into  the  kartells'  treasury  the  difference  between 
his  assigned  basic  price  and  the  minimum  sales  price. 
The  latter  price  is  not  made  obligatory  upon  the  members 
who  may  sell  their  product  for  more  or  less,  but  it  serves 
merely  to  measure  the  amount  that  must  be  turned  over 
to  the  kartell.    This  sum  is  then  periodically  distributed 


282  COMBINATION    ORGANIZATIONS 

among  them  according  to  their  production.  The  chief 
advantage  of  the  plan  is  said  to  come  from  stimulating 
improvements  in  technique  by  which  the  members  seek  to 
force  their  production  costs  below  the  basic  price-  For 
this  reason  this  method  is  generally  used  to  supplement  and 
round  out  the  kartells  that  are  based  primarily  on  the 
other  methods. 

(4)  Restrictions  on  production  have  figured  prominently 
in  the  formation  of  the  more  recent  kartells.  In  general, 
these  kartells  employ  one  of  two  practices;  they  either  cut 
down  the  working  time  or  fix  a  maximum  output  that  is 
to  be  pro-rated  among  the  several  members.  Where  the 
time  factor  is  used  as  a  base  it  is  applied  in  some  such  way 
as  reducing  the  number  of  hours  in  the  work  day,  reducing 
the  number  of  work  days  per  week  or  limiting  the  number 
of  hours  per  day  per  week  during  which  the -machinery  used 
to  produce  the  article  may  be  operated.  Where  the  maxi- 
mum output  method  is  used  the  total  output  is  arrived  at 
from  the  standpoint  of  the  market  demand.  Each  member 
is  then  allotted  a  quota  based  either  on  previous  actual 
production,  or  on  capacity  for  production.  The  first  of 
these  methods  is  not  as  effective  as  the  second  because  it 
tends  to  bring  about  a  greater  intensity  of  production 
which  may  result  in  a  failure  to  reduce  the  total  quantity 
produced.  On  the  other  hand,  the  second  method  also  has 
its  difficulties.  It  is  easy  enough  to  reduce  the  total  output 
and  in  this  way  the  quota  of  each  member,  for  the  latter  is 
usually  a  percentage  of  the  total.  Nevertheless,  there  is 
constant  friction  because  the  plan  makes  little  or  no  allow- 
ance for  improved  methods  of  production  and  technical 
efficiency.  And  whenever  the  kartell  agreement  comes  up 
for  revision  or  renewal,  there  is  always  a  fierce  fight  for 
readjustment  of  quotas.  In  the  coal  industry  this  demand 
for  larger  quotas  on  the  part  of  the  larger,  more  efficient 
mines  has  caused  many  of  them  to  buy  out  their  smaller 


ASSOCIATIONS,    FEDERATIONS,    ETC.        283 

and  less  efficient  competitors  in  order  that  they  might  add 
the  quotas  for  the  latter  to  their  own. 

Where  integrated  establishments  become  members  of 
this  type  of  kartell  they  usually  demand  that  raw  ma- 
terials, which  they  work  up  themselves,  shall  be  included 
in  the  agreement  only  to  the  amount  of  the  surplus  which 
they  do  not  use.  Dr.  Mannstaedt,--  for  example,  states 
that  certain  mixed  steel  works  became  members  of  the  pig 
iron  syndicate  formed  for  export  purposes  in  1879,  by  the 
producers  of  Lothringen  and  Luxemberg.  Under  the 
agreement,  they  were  permitted  upon  due  notice  to  the 
syndicate  to  withdraw  the  pig  iron  that  they  themselves 
used.  During  the  period  of  business  activity  that  began 
in  the  decade,  1890-1900,  it  chanced  that  these  steel  works 
were  late  in  notifying  the  syndicate  of  the  amount  of  pig 
iron  that  they  required  for  their  own  use.  When  the  notice 
did  come,  they  were  advised  that  the  syndicate  had  already 
contracted  to  sell  this  quantity  to  foreign  buyers.  Thus, 
in  the  face  of  their  own  pressing  need,  these  plants  were 
obliged  to  deliver  their  iron  to  the  kartell.  The  outcome 
of  this  was  that  the  steel  works  demanded  a  change  in  the 
agreement  when  negotiations  for  renewal  of  the  syndi- 
cate were  begun  in  1900.  They  desired  to  remain 
active  members  of  the  syndicate  without  having 
definite  quotas  assigned  to  them,  but  wanted  also  the 
right  to  turn  their  surplus  over  to  the  syndicate  for 
sale.  The  only  obligation  they  w'ished  to  assume 
was  not  to  sell  any  pig  iron  except  through  the 
syndicate.  These  proposals  were  unacceptable  to  the  pure 
blast  furnaces.  Finally,  it  was  agreed  that  the  steel  works 
should  participate  in  the  syndicate  only  to  a  predetermined 
amount  of  their  total  production,  exempting  what  they 
needed  for  their  own  use.  They  also  were  given  the  privi- 
lege of  withdrawing  portions  of  their  quotas  from  syndicate 
control  by  the  other  members. 

22    Ibid. 


284  COMBINATION    ORGANIZATIONS 

In  the  Westphalian  Coal  Syndicate  the  integrated  mem- 
bers profited  at  the  expense  of  the  unintegrated.  During 
the  industrial  depression  of  the  early  nineties  the  demand 
for  coal  dropped  enormously  while  the  syndicate  refused 
to  reduce  prices  correspondingly.  The  small  mines  were 
hard  hit,  while  those  that  used  their  own  coal  in  their 
accessory  undertakings  were  able  to  mine  at  somewhere 
near  capacity  by  concentrating  on  the  manufacture  of  non- 
kartellized  products  which  they  disposed  of  abroad  at  cut 
prices. 

Integration  by  Kartells.  —  Under  modern  industrial 
organization  horizontal  combinations  of  producers  of  a 
given  commodity  find  that  control  over  production  alone 
does  not  suffice  to  stabilize  the  market.  Consequently 
they  reach  out  to  control  also  its  distribution,  because 
competition  between  distributors  may  be  almost  as  up- 
setting to  market  prices  as  competition  between  the  pro- 
ducers themselves.  We  have  already  seen  how  some  of  our 
pools,  notably  that  controlling  the  manufacture  and  sale 
of  patent  medicines  followed  this  practice.  The  same  con- 
dition is  found  to  exist  in  the  larger  kartells  such  as  the 
Rheinisch-Westfalische  Kolensyndikat  and  the  Stahlwerks- 
verband. 

The  above  named  Westphalian  Coal  Syndicate  has  bind- 
ing agreements  with  wholesalers  whereby  the  latter  pledge 
themselves  to  place  with  it  orders  of  uniform  size  at  more 
or  less  regular  intervals.  In  order  to  reduce  competition 
between  these  wholesalers  as  far  as  possible,  the  syndicate 
divided  its  territorial  market  into  29  districts,  and  not  only 
assigned  a  given  district  to  certain  of  these  wholesalers, 
but  even  allotted  to  them  the  disposal  of  certain  of  its 
producing  members.  But,  because  a  few  dealers  did  not 
come  in  on  these  agreements,  the  wholesalers  of  the  Kassel 
District,  with  aid  of  the  syndicate,  in  189G  formed  a  limited 
company  under  the  name  "  Gliickauf."    The  others  soon 


ASSOCIATIONS,    FEDERATIONS,    ETC.        285 

followed,  and  by  1912  there  were  ten  such  coal  selling  com- 
panies cooperating  with  the  syndicate-  They  are  more  or 
less  under  the  control  of  the  syndicate,  which,  however, 
pledged  itself  to  sell  its  coal  only  to  them  within  their 
assigned  districts.  The  former  independent  dealers 
pledged  themselves  not  to  set  up  new  coal  selling  establish- 
ments. They  participated  in  the  business  of  the  companies 
in  the  same  proportion  that  the  sale  of  coal  of  each  bore 
to  the  total  sold  by  all,  and  the  profits  were  distributed  on 
the  same  plan.  The  conditions  of  sale  under  which  the 
companies  were  to  sell  their  coal  were  brought  into  close 
correlation  with  those  of  the  syndicate.  In  several  cities  the 
coal  retailers  followed  the  example  of  the  wholesalers  by 
organizing  similar  companies. 

Another  feature  of  the  organization  of  this  kartell  con- 
sists of  the  Rheinische-Kolenhandels-  und  Reedereigesell- 
schaft,^^  commonly  called  the  "  Kolenkontor."  This  com- 
pany was  formed  in  1904  to  stabilize  prices  and  control 
shipments  of  coal  by  water  on  the  Rhine  and  by  rail  to 
South  Germany,  Switzerland  and  parts  of  Austria.  Ocean 
shipments  and  those  reshipped  to  Belgium  and  France  were 
not  included-  The  membership  of  the  "  Kontor,"  in  addi- 
tion to  the  Syndicate,  included  the  four  "  Reederzechen," 
that  is  to  say,  Franz  Haniel  &  Company,  Mathias 
Stinnes,  Hugo  Stinnes,  and  the  Bergbau-  und  Schiffahrts- 
Aktiengeselschaft,  which  own  the  transport  facilities 
jointly.  These  four  concerns,  however,  participate  in  the 
Syndicate  only  to  the  extent  of  the  coal  handled. 

Distribution  of  Kartell  Organizations.  —  Continental 
Europe  is  the  home  of  the  kartell,  for  there  it  enjoys  the 
full  protection  of  the  law.  But  even  so,  it  has  attained  a 
prominent  place  largely  only  in  those  countries  where  the 
influence  of  the  German  industrial  organization  is  strong. 

23  The  name  Reederei  is  used  to  designate  a  partnership  or  com- 
pany engaged  in  owning  and  operating  inland  or  coastwise  vessels 
with  or  without  the  necessary  dock  facilities. 


286         COMBINATION    ORGANIZATIONS 

Thus  we  find  a  great  many  of  them  in  Switzerland,  Hol- 
land, Belgium,  Sweden,  Denmark,  Austria,  Czecho-Slovakia 
and  Hungary  and  also  some  in  Italy.  However,  in  Ger- 
many they  appear  to  have  been,  and  to  large  extent  still 
are,  the  favorite  form  of  organization.  According  to  the 
government  reports,  there  were  in  that  country,  in  1916, 
over  500  kartells  exclusive  of  the  loose  organizations 
effected  through  factors'  agreements.  Most  of  them  are 
highly  centralized  organizations  that  place  considerable 
power  of  control  in  the  hands  of  the  kartell. 

Although  kartells  and  pools  have  not  been  unknown  in 
England  in  the  coal,  iron,  cement,  porcelain,  wall-paper, 
textile  and  chemical  industries,  these  generally  have  been 
very  loose  price  and  production  kartells  of  a  temporary 
nature.  The  relative  absence  of  kartells  in  England  is 
ascribed,  by  Professor  Liefmann,  in  his  monograph  on 
Kartells  and  Trusts,  to  (1)  the  stringency  of  laws  against 
organizations  and  combinations  in  restraint  of  trade;  (2) 
the  individualistic  conception  of  enterprise  based  upon  the 
English  economic  teachings  that  free  competition  is  the 
natural  economic  condition;  (3)  the  effect  of  free  trade, 
making  it  almost  impossible  to  have  a  higher  price  at  home 
than  abroad;  and  (4)  geographic  conditions  that  make  it 
easy  for  foreign  competition  to  reach  nearly  all  parts  of 
the  United  Kingdom,  and  also  make  the  establishment  of 
definitely  circumscribed  markets  very  difficult. 

Effect   of   Federation    Organizations   upon 
Industry 

Federation  organizations  are  by  no  means  an  unmixed 
blessing  to  the  industry  in  which  they  occur.  There  are 
certain  outstanding  advantages  as  well  as  disadvantages 
attendant  upon  their  use.  But  on  the  whole  it  may  be  said 
that  the  advantages  predominate  —  a  fact  that  is  clearly 


ASSOCIATIONS,    FEDERATIONS,    ETC.        287 

brought  out  by  a  brief  consideration  of  both  sides  of  the 
question. 

Advantages.  —  The  possibility  of  exercising  a  direct  in- 
fluence upon  the  establishment  of  an  artificial  price  and 
the  relative  freedom  from  the  exasperating  fluctuations  in 
business  that  are  brought  on  by  the  unimpeded  play  of  the 
laws  of  supply  and  demand,  are  perhaps  the  most  im- 
portant advantages  that  federation  organizations  have  to 
offer  their  members.  The  members  are  thus  in  a  position 
to  take  advantage  of  a  period  of  growing  business  activity 
to  effect  a  steady  and  gradual  increase  in  prices  without 
the  necessity  of  continually  keeping  an  eye  on  the  action 
of  competition.  Also,  during  periods  of  business  depres- 
sion, which  are  usually  accompanied  by  a  rapid  fall  in 
prices,  the  federation  is  able  to  retard  the  rapidity  of  decline 
and,  in  a  measure,  to  prevent  the  laying  off  of  large  quan- 
tities of  labor  by  shortening  hours  or  reducing  the  number 
of  work  days  per  week.  The  greater  uniformity  in  prices 
and  closer  correlation  between  supply  and  demand  also 
lessen  the  capital  risk,  thus  drawing  new  capital  into  the 
industry.  For  the  same  reason  pools  and  kartells,  where 
they  are  more  or  less  permanent,  have  a  tendency  to  force 
up  the  price  of  the  securities  of  member  companies. 
Furthermore,  the  members  can  benefit  materially  through 
federation  agreements  covering  terms  of  sale,  methods  of 
payment,  rebates,  extension  of  credit,  charges  for  packing, 
etc.  Such  standardization  can  become  a  lasting  social  and 
economic  benefit  to  the  community  at  large  as  well  as  the 
industry  about  which  the  federation  centers. 

Disadvantages.  —  By  entering  a  federation  organization 
the  individual  enterprise  must  necessarily  sacrifice  some  of 
its  independence  and  disclose  many  of  its  business  methods 
to  its  competitors-  But  on  the  other  hand,  this  sacrifice 
of  independence  does  not  go  far  enough  in  certain  direc- 
tions.    During  periods  of  prosperity  the  members  of  the 


288         COMBINATION    ORGANIZATIONS 

kartell  or  pool  usually  have  a  free  hand  in  carrying  out 
extensions  to  their  establishments  in  order  to  increase  their 
productive  capacity.  And  even  in  periods  of  depression 
they  frequently  do  the  same  thing  so  that  they  may  be  in  a 
position  to  take  full  advantage  of  the  market  when  busi- 
ness picks  up.  The  natural  result  is  that  the  combine  finds 
itself  unable  to  dispose  of  the  product  forced  upon  it  and 
dissolves,  throwing  the  members  back  upon  a  competitive 
basis,  in  a  worse  condition  than  they  were  before.  Of  still 
greater  disadvantage  is  the  growth  of  independent  estab- 
lishments of  a  like  character.  These,  where  they  can 
maintain  themselves,  can  take  advantage  of  the  combine's 
high  prices  by  barely  under-bidding  it,  while  they  remain 
free  from  the  limitations  and  restrictions  imposed  upon  the 
members.  Unless  a  monopoly  over  the  product  is  se- 
cured, there  is  no  way  in  which  the  rise  of  such  independents 
can  legitimately  be  controlled.  Consequently,  the  federa- 
tion stoops  to  the  use  of  all  kinds  of  questionable  and  illegal 
methods  to  suppress  this  new  competitor  or  is  forced  to 
take  him  into  the  fold. 

Another  disadvantage,  more  particularly  from  the  em- 
ployer's point  of  view,  but  not  necessarily  from  the  social 
side,  is  the  marshalling  of  employees  as  a  body  against 
the  members  of  the  federation.  Naturally,  when  the 
establishments  in  an  industry  have  combined  to  form  a 
strong  pool  or  a  kartell,  each  member  is  less  free  to  handle 
his  own  labor  problem.  The  employees,  realizing  this  fact, 
take  advantage  of  the  situation  to  bring  pressure  to  bear 
not  alone  on  the  combination,  but  through  it  upon  its  in- 
dividual members.  In  the  end,  the  employees  will  make 
their  demands  upon  the  industry  as  a  whole  rather  than 
upon  individual  employers.  The  more  or  less  direct  effect 
upon  the  workers  is  to  bring  about  a  greater  uniformity 
in  wages  and  working  conditions  as  well  as  a  greater  regu- 
larity  of  work.     The  benefits  that  may   thus   accrue  to 


ASSOCIATIONS,    FEDERATIONS,    ETC.       289 

labor  through  well  regulated  combinations  of  this  type 
must  not  be  overlooked.  On  the  other  hand,  the  control 
company  and  trust,  when  at  the  head  of  fully  integrated 
industries,  are  in  a  position  to  dictate  to  their  employees 
and  to  carry  on  a  labor  war  with  much  greater  effective- 
ness than  the  federation. 


CHAPTER   XV 

SUBSTITUTION  OF  SECURITIES:  INVESTMENT  COMPANIES 

Where  the  outstanding  securities  of  one  or  more  com- 
panies are  acquired  from  the  holders  thereof  by  another 
company  that  ^ives  its  own  securities  in  exchange,  thus 
substituting  a  new  medium  through  which  the  income  de- 
rived from  the  underlying  capital  is  to  be  distributed, 
there  is  an  application  of  the  principle  of  substitution  of 
securities.  The  types  of  ownership  organizations  through 
which  this  may  be  accomplished  must,  quite  obviously,  be 
securities-issuing  organizations  that  are  empowered  to 
hold  the  securities  of  other  business  organizations.  Of 
these,  the  holding  corporation  is  the  outstanding  favorite, 
though  the  holding  trust  is  also  extensively  used.  The  joint 
stock  company,  due  to  its  lack  of  distinct  legal  entity,  is 
ill  adapted  to  the  principle,  and  in  consequence  it  is  seldom 
employed- 

The  direct  effect  of  an  application  of  the  principle  of 
substitution  of  securities  by  ownership  organizations  that 
enjoy  legal  entity,  is  very  complex.  Simply  stated,  it 
results  in  a  combination  of  the  claims  to  income  accruing 
to  the  invested  capital  underlying  the  securities,  and  of 
the  claims  to  a  porportionate  share  of  the  capital  itself; 
and  there  is  inherent  in  it  the  possibility  of  complete  cen- 
tralization of  control  over  the  enterprises  concerned.  In 
other  words,  it  substitutes,  as  claimant,  a  single  legal  en- 
tity in  place  of  the  former  security  holders  and  vests  that 
entity  with  all  of  their  rights,  powers  and  privileges  as 

290 


SUBSTITUTION    OF    SECURITIES         291 

holders  of  ownership  or  creditor  securities.  But  these 
rights,  powers  and  privileges  are  in  turn  indirectly  trans- 
mitted to  the  holders  of  the  securities  that  the  holding 
organization  issues.  A  simple  illustration  will  serve  to 
make  these  points  clear. 

A  holding  company  D  acquires  the  securities  of  corpora- 
tions A,  B  and  C  from  their  stockholders,  who  receive  cor- 
poration D's  securities  instead.  The  holding  company's 
assets  now  are  the  securities  of  corporations  A,  B  and  C, 
but  they  are  in  turn  supported  by  the  capital  investments 
of  these  three  subsidiaries.  The  income  accruing  to  this 
capital  still  goes  directly  to  the  subsidiaries  which,  how- 
ever, transmit  it  to  the  holding  company  in  proportion 
to  its  holdings  of  A,  B  and  C  stocks.  Then,  this  company 
in  turn  redistributes  it  among  its  own  stockholders.  These 
stockholders,  who  have  exchanged  their  A,  B  and  C  stocks 
for  D  stock,  now  have,  in  the  final  analysis,  three  sources 
of  income,  where  formerly,  each  group  —  A  stockholders, 
B  stockholders  and  C  stockholders  —  had  each  but  a 
single  source  of  income.  Thus,  any  differences  in  the  divi- 
dend-paying ability  of  the  three  original  companies  have 
been  averaged  up  through  the  medium  of  substitution  of 
securities.  The  claim  of  the  stockholders  to  the  capital  of 
the  enterprises  involved  has  undergone  a  similar  change. 
Their  first  claim  is  on  the  securities  capital  of  the  holding 
company,  and  through  this  the  claim  reverts  to'  the  business 
capital  of  the  subsidiaries.  Their  control  over  the  hold- 
ing company  gives  them  in  like  manner  control  over  the 
subsidiaries;  for  the  holding  company  owns  the  majority 
of  the  stock  of  companies  A,  B  and  C  and,  therefore,  con- 
trols them. 

Turning  from  the  economic  to  the  legal  results,  the  first 
thing  that  strikes  the  mind  is  that  the  legal  entity,  or  be- 
ing of  the  subsidiaries  has  not  been  destroyed,  and  that 
a  new  legal  entity,  the  holding  company,  has  been  created. 


292  COMBINATION    ORGANIZATIONS 

Each  one  of  these  legal  entities  must  have  its  own  capital 
assets.  Each  of  the  subsidiaries  owns  its  own  plant 
and  equipment  in  its  own  name  —  in  other  words,  each 
has  a  legal  title  in  a  definite  accumulation  of  economic 
capital  —  assuming  of  course  that  they  are  primary  or 
operating  companies.  The  holding  company's  assets  are 
the  securities  of  its  subsidiaries.  To  these  only  does  it 
have  the  legal  title.  But  as  a  stockholder  in  each  of  the 
subsidiaries  it  enjoys  all  of  the  rights  and  powers  embodied 
in  that  relation,  including  a  claim  on  the  basic  capital. 

We  may,  then,  restate  the  results  of  the  process  of  securi- 
ties-substitution to  be: 

1.  The  continuance  of  legal  title  to  definite  accumulations  of 

basic  underlying  capital  in  legally  independent  ownership 
entities. 

2.  The  combination,  either  in  whole  or  in  part,  of  such  accumu- 

lations of  capital  into  an  economic  business  unit. 

3.  The  legal  unification  of  proportionate  claims  to  income  ac- 

cruing to  such  capital  and 

4.  The  possibility  of  a  centralized,  unified,  control  over  it. 

Participation  as  an  Application  of  the  Principle  of 
Substitution.  —  That  there  is  more  than  one  use  that  may 
be  made  of  the  principle  of  substitution  of  securities  has 
already  been  indicated  in  the  preceding  paragraph.  In  the 
first  place,  it  may  be  employed  to  create  a  more  or  less 
permanent  relation  between  the  several  companies  in- 
volved, so  that  the  holding  company  becomes  a  participant 
in  the  enterprises  conducted  by  the  companies  whose  securi- 
ties it  holds.  In  the  second  place,  the  arrangement  may  be 
characterized  by  its  temporary  nature,  being  employed 
merely  to  facilitate  the  accumulation  of  sufficient  capital 
by  the  companies  whose  securities  are  held,  the  ultimate 
aim  of  the  holding  company  being  to  sell  these  securities 
finally  to  permanent  investors.    In  such  cases  the  holding 


SUBSTITUTION    OF    SECURITIES         293 

company  does  not  aim  to  become  a  participant  in  the  enter- 
prises of  the  other  companies,  but  renders  them  a  service 
by  furnishing  the  money  capital  to  be  converted  into  busi- 
ness capital,  namely,  it  finances  them.  These  two  uses  of 
the  securities-substitution  principle  may  thus  be  said  to 
give  rise  to  two  classes  of  holding  companies,  namely;  (1) 
participation  companies  and  (2)  finance  companies. 

Kinds  of  Participation.  —  Participation  through  substi- 
tution of  securities  may  be  either  partial  or  complete;  and 
it  may  arise  merely  out  of  a  voluntary  desire,  or  out  of 
economic  or  legal  necessity.  Present  day  practices  present 
three  distinct  applications  of  the  participation  principle, 
each  of  which  gives  rise  to  specialized  companies  through 
which  they  are  brought  into  use. 

A.  The  first  use  of  participation  is  to  minimize  as  much 
as  possible  the  speculative  features  that  characterize  most 
securities  and  in  this  way  to  widen  the  market  for  them 
by  making  them  appeal  to  small  investors.  A  particular 
issue  of  securities  may  have  a  high  rate  of  return;  another, 
a  low  rate ;  a  third,  may  exhibit  irregular  fluctuations,  while 
still  a  fourth  gives  a  regular,  stable,  income  to  the  holder. 
By  combining  the  earnings  of  a  large  number  of  various 
types  and  kinds  of  securities  the  varying  rates  of  return 
from  individual  units  may  be  averaged,  the  high  interest 
and  dividend  rates  counterbalancing  the  low.  A  wealthy 
capitalist  is  in  a  position  to  apply  this  law  of  averages 
for  himself  to  his  investments  in  securities;  but  a  small  in- 
vestor is  in  no  position  to  do  so.  He  must  take  a  chance 
unless  some  other  agency  applies  it  for  him.  This  may 
be  accomplished  through  participation  by  substitution  of 
securities.  For  instance,  a  holding  company  may  issue  its 
own  securities  to  investors  and  use  the  funds  received  from 
them  to  purchase  a  great  variety  of  securities  in  the  mar- 
ket, or  to  purchase  them  directly  from  the  issuing  organiza- 
tions.   It  then  derives  its  income  from  the  large  number  of 


294  COMBINATION    ORGANIZATIONS 

enterprises  whose  securities  it  holds  and  transmits  it  to 
the  holders  of  its  own  securities  in  averaged  form.  Such  a 
procedure  is  an  application  of  the  investment  principle  to 
securities  capital,  and  the  holding  companies  performing 
this  function  may  very  properly  be  called  investment 
companies. 

B.  The  second  use  of  the  participation  principle  arises 
out  of  a  desire  to  establish  a  unified  control  over  one  or 
more  securities-issuing  organizations  through  the  ac- 
quisition by  the  holding  company  of  all  or  a  majority  of 
their  voting  stocks.  In  operations  of  this  kind  there  is 
naturally  a  tendency  to  make  the  participation  as  complete 
as  possible,  giving  it  more  the  character  of  true  owner- 
ship. In  the  United  States,  this  is  the  chief  purpose  for 
which  the  security-holding  power  has  generally  been  re- 
quested. For  this  reason  the  name  "  holding  company  " 
has  come  into  general  use  to  designate  participation  organi- 
zations of  this  type-  However,  in  order  to  distinguish  them 
clearly  from  the  other  types  of  holding  companies,  they 
will  here  be  called  control  companies.  Where  the  partici- 
pation of  the  control  company  in  other  companies  is  only 
little  more  than  a  majority  control,  the  latter  are  usually 
designated  as  controlled  companies;  and  where  it  is  com- 
plete or  very  nearly  so,  they  are  known  as  proprieta/ry 
companies. 

C.  The  third  use  arises  out  of  the  existence  in  certain  in- 
dustries of  economic  or  legal  conditions  that  make  it  imprac- 
tical to  issue  the  securities  of  operating  companies  directly 
to  the  public.  In  order  to  effect  the  "  securitization " 
of  capital  invested  in  such  undertakings,  it  becomes  neces- 
sary to  interpose  between  the  final  investor  and  the  organi- 
zation directly  conducting  the  enterprise  a  secondary  securi- 
ties-issuing company  that  can  assume,  as  its  permanent 
business  capital,  the  securities  of  the  operating  concerns. 
To  this  type  of  participation  company  is  given  the  name, 
assumption  company. 


SUBSTITUTION    OF    SECURITIES         295 

Commenting  upon  the  occurence  of  these  three  types  of 
participation  companies  and  their  distribution  throughout 
the  world,  Professor  Robert  Liefmann,^  a  recognized 
authority  on  the  subject,  says:  "  It  is  noteworthy  that, 
today,  in  each  of  the  great  commercial  and  industrial  coun- 
tries some  one  of  these  three  types  of  companies  is  con- 
spicuously prominent.  England  is  the  land  of  the  invest- 
ment trusts  and  investment  companies.  In  America, 
control  of  other  undertakings  is  almost  exclusively  the 
purpose  for  which  the  substitution  of  securities  is  employed. 
In  Germany  the  securities-assumption  companies  have 
attained  a  prominence  that  far  surpasses  any  that  organ- 
izations for  the  accomplishment  of  like  ends  in  other  coun- 
tries exhibit.  But  any  single  one  of  these  three  types  of 
participation  companies  is  not  to  be  found  exclusively  in 
its  respective  country.  There  are  in  England  also  some 
control  companies;  in  America  also  some  investment  com- 
panies, though  they  emanate  chiefly  from  England,  and 
also  a  few  securities-assumption  companies;  in  Germany 
also  a  few  control  companies.  But  of  the  three  types  de- 
scribed, each  one  is,  respectively,  predominant  in  some  one 
of  the  three  countries,  so  that  each  type  may  be  regarded  as 
characteristic  of  a  given  country.  Of  other  states  where 
securitization  of  capital  has  developed,  France  has  a  num- 
ber of  investment  companies,  and  the  principle  of  securi- 
ties-assumption also  has  attained  some  development.  Bel- 
gium, to  the  contrary,  has  followed  the  German  example 
and  has  a  larger  number  of  assumption  companies  because 
it  has  developed  just  that  particular  field  for  capital  in- 
vestment in  which  the  system  of  assumption  companies 
plays  the  chief  role  (electric  light  and  power  establish- 
ments) .  Holland,  as  an  interest  receiving  state,  follows  the 
French  plan  and  has  a  number  of  investment  companies. 

^  R.  Liefmann,  Bptciligimgs-  und  Finnnzierungsgesellschajten, 
Sec.  Ed.  1916,  pp.  78-79  (Translation  by  the  author). 


296  COMBINATION    ORGANIZATIONS 

In  Switzerland,  chiefly  as  a  result  of  outside  influence,  a 
whole  array  of  investment  and  assumption  companies  have 
been  formed.  In  all  other  countries,  the  principle  of  substi- 
tution of  securities  has  at  times  been  used  in  one  or  another 
of  its  several  different  forms,  but  these  have  not  as  yet 
attained  a  sufficiently  advanced  industrial  development  to 
permit  of  ascribing  to  them,  with  any  degree  of  certainty, 
any  marked  tendency  of  development  in  one  or  another 
direction." 

It  is  quite  apparent  that  a  participation  company  need 
not  confine  its  activities  to  any  one  of  these  three  uses  to 
the  exclusion  of  the  others.  Indeed,  it  is  very  common  to 
find  a  single  company  performing  two  and  sometimes  even 
all  three  of  these  services.  Nevertheless,  there  are  a  large 
number  of  companies  that  are  distinctly  representative  of 
these  several  types.  A  brief  description  of  some  of  these 
companies  will  serve  to  illustrate  the  practical  use  made  of 
them. 

Investment  Companies 

England  is  the  great  home  of  investment  companies. 
They  have  been  in  use  in  that  country  since  1868.  From 
that  time  on  they  increased  slowly  in  number  for  about  two 
decades.  In  1888,  however,  began  a  period  of  very  rapid 
growth  that  was  checked  only  by  the  advent  of  the  crisis 
of  1892.  Since  1897,  they  have  again  become  prominent 
features  of  the  English  business  world,  and  in  1911  there 
were  over  125  of  them  listed.  Their  adoption  by  other 
countries  has  been  rather  limited,  with  the  possible  excep- 
tion of  France,  where  they  are  fairly  common. 

English  Investment  Companies.  —  A  study  of  the  ex- 
tent and  kinds  of  holdings  of  English  investment  companies 
leads  one  to  the  conclusion  that  there  are  two  general 
classes,  namely;  (1)  those  that  carry  on  a  general  invest- 
ment business  by  purchasing  securities  of  enterprises 
engaged     in     many     industrial     and     commercial     fields; 


INVESTMENT    COMPANIES  297 

and  (2)  those  that  confine  their  holdings  to  particular 
industries,  and  sometimes  even  to  particular  localities. 
The  latter  class  seems  to  be  the  general  favorite,  invading 
such  industrial  fields  as  railways,  mining,  colonial  explora- 
tion and  development  projects,  petroleum,  tea,  rubber, 
nitrate,  wireless  telegraph  undertakings  and  ocean 
transportation. 

Another  characteristic  of  British  investment  companies  is 
the  extensive  use  made  of  the  securities-issuing  trust  as 
the  holding  organization  in  which  the  title  to  the  securities 
acquired  is  vested.  They  are  in  far  more  common  use 
for  this  purpose  than  any  other  form  of  ownership 
organization. 

Among  the  English  companies  that  carry  on  a  general 
investment  business  there  are  a  number  of  excellent  ex- 
amples. The  Stock  Conversion  and  Investment  Company, 
founded  in  1889  with  a  capital  of  £857,000,  to  convert  exist- 
ing securities  into  several  new  classes,  gave  in  exchange  for 
a  block  of  London  and  Northwestern  Ordinary  Shares  three 
different  kinds  of  stocks  and  bonds,  and  for  a  block  of 
North  Eastern  Railway  Consols  two  new  classes  of  stocks. 
The  company  does  not  confine  its  activities  exclusively  to 
holding  railway  securities,  but  has  also  entered  other 
fields.  Other  companies  of  this  type  are  the  United  States 
and  South  American  Investment  Trust  Company,  founded 
1886,  with  a  capital  of  £1,325,000;  the  Foreign  American 
and  General  Investment  Trust  Company,  1883,  with  a  paid- 
in  capital  of  £2,000,000;  the  Merchants  Trust,  Ltd.,  1889, 
v/ith  a  capital  of  £2,100,000  and  the  North  American  Trust 
Company,  1896,  with  a  capital  of  £2,000,000.  There  is  in 
the  trust  agreement  of  the  last  named  company  a  provision 
that  not  more  than  ten  per  cent  of  its  capital  may  be  in- 
vested in  any  single  issue  of  securities.  A  similar  limita- 
tion is  found  in  the  Industrial  and  General  Trust,  founded 
in  1889,  with  a  capital  of  £1,325,000-    The  trustees  of  this 


298  COMBINATION    ORGANIZATIONS 

company  may  not  invest  over  three  per  cent  of  its  capital  in 
a  single  undertaking.  The  New  African  Company,  1894, 
with  a  capital  of  £283,000  is  another  good  example  of  this 
type.  It  acquired  the  securities  of  seven  undertakings  in- 
cluding shares  of  the  Marconi  Wireless  Telegraph  Company 
and  several  railway,  land  and  mining  companies.  The  Cale- 
donian Trust  Company,  1910,  with  a  capital  of  £811,000  to 
be  invested  in  American  securities,  may  not  put  more  than 
20  per  cent  of  its  capital  in  a  single  enterprise. 

British  investment  companies  that  specialize  in  the  se- 
curities of  particular  industries  or  regions  are  more  numer- 
ous than  the  general  type.  Among  those  that  specialize 
in  mining  securities  are  the  Johannesburg  Gold  Fields, 
founded  in  1889,  with  a  capital  of  £162,000;  the  Oceana 
Development  Company,  that  owns  securities  of  the  Balkis, 
New  Charterland  Exploration  Company,  the  Van  Ryn 
Mines  and  other  enterprises  of  the  South  African  Rand 
District;  the  Rhodesian  Mines  Trust,  and  the  Diamond 
Mining  Investment  Company  which  owns  diamond  mine 
and  oil  securities.  Most  of  these  companies  were  founded 
since  1890.  The  shipping  industry  is  represented  by  the 
Scottish  Ship  &  Ship  Share  Investment  Company,  organized 
1893  with  a  capital  of  £13,970.  In  the  public  utilities  field 
is  the  American  &  British  Securities  Company  with  a  capi- 
tal of  £180,000.  The  rapid  development  of  rubber  planta- 
tions in  the  East  Indies  has  also  given  rise  to  a  considerable 
number  of  investment  companies  such  as  the  Rubber  Share 
Trust  &  Finance  Company  with  a  capital  of  £350,000;  the 
Anglo-Malay  Investment  Trust,  £135,000,  and  the  British 
North  Borneo  Rubber  Trust  with  £1,000,000  capital.  These 
companies,  however,  do  not  confine  their  activities  entirely 
to  investment  but  also  promote  rubber  plantation  undertak- 
ings. Regional  investment  companies  arc  represented  by  the 
American  Trust  Company  founded  in  1902  with  £1,769,000 
capital  and  the  African  Trust,  Ltd.,  1905,  with  £200,000 


INVESTMENT    COMPANIES  299 

capital.  The  latter  holds  securities  of  the  Consolidated 
Rand  Mines,  Rhodesia  Trust  &  General  Exploration  Com- 
pany, East  Africa  Pearl  &  Sponge  Company  and  others. 

American  Investment  Companies.  —  In  the  United 
States  there  are  few  securities-issuing  organizations  that 
might  be  called  pure  investment  companies.  It  has  been 
the  practice  in  this  country  to  emphasize  the  control  rather 
than  the  investment  function,  but  the  latter  service  is  fre- 
quently combined  with  the  former.  This  is  conspicuously 
true  of  our  railroad  companies.  For  example,  the  Union 
Pacific  Railroad  Company  operates  3,614  miles  of  railway 
in  its  own  name,  controls  through  two  owned  companies 
some  4,418  additional  miles,  and  participates  in  the  earn- 
ings of  about  100,000  miles  of  railways  owned  and  operated 
by  most  of  the  big  railroad  companies  in  the  country. 
Among  these  companies,  whose  securities  it  holds  as  in- 
vestments, appear  the  Pennsylvania  Railroad,  New  York 
Central,  Baltimore  &  Ohio,  Chicago  &  Alton,  Chicago  & 
Northwestern,  Great  Northern,  Chesapeake  &  Ohio,  and 
Chicago,  Milwaukee  and  St.  Paul.  The  value  assigned  to 
the  securities  of  these  roads  held  by  the  Union  Pacific,  in 
1919,  was  $90,445,  272  in  stocks  and  $109,864,809  in  bonds, 
which  added  to  its  $16,362,050  of  United  States  Liberty 
bonds,  makes  a  grand  total  of  $216,672,131  in  investment 
securities.  This  sum  was  about  one  seventh  of  its  total  in- 
vested capital.  It  is  at  once  clear  that  this  railroad  com- 
pany performs  the  investment  function  on  a  much  more 
gigantic  scale  than  the  simple  investment  companies  of 
Britain.  Nor  is  this  railroad  an  exceptional  case,  for  prac- 
tically all  of  the  railroad  companies  mentioned  in  this  para- 
graph have  extensive  holdings  in  other  companies  for  in- 
vestment purposes. 

The  pure  investment  company,  however,  also  has  made 
its  appearance  in  the  United  States  since  about  1905.  For 
instance  the  City  Investing  Company  was  formed  in  New 


300  COMBINATION    ORGANIZATIONS 

York  in  1905  with  a  capital  of  $5,000,000  to  deal  in  real 
estate  and  to  carry  on  a  general  investment  business.  It 
now  holds  large  blocks  of  bonds,  mortgages  and  stocks. 
The  Federal  Utilities,  Incorporated,  was  chartered  in  1911 
under  the  laws  of  Virginia  to  hold  stocks  and  bonds  and 
other  securities  and  properties  of  electric  light  and  power 
and  other  public  utilities.  The  original  capital  of 
$1,000,000  was  paid  in  in  cash  and  this  was  used  to  acquire 
securities  primarily  for  investment  purposes.  The  Chicago 
Securities  Company  was  incorporated  under  the  laws  of 
Delaware  in  1912  with  an  authorized  capital  of  $800,000 
to  take  over  first  mortgages  on  real  estate  and  United 
States  bonds  and  other  securities. 

Several  large  investment  companies  sprang  up  as  a  re- 
sult of  the  World  War.  The  American  Foreign  Securi- 
ties Company  was  incorporated  in  1916  in  Delaware  with 
an  authorized  capital  of  $10,000,000.  It  then  received 
from  the  French  Government  $120,000,000  in  various  kinds 
of  securities  as  security  for  a  loan  of  $100,000,000,  which 
the  company  itself  procured  by  issuing  $94,500,000  of  its 
own  three-year,  five  per  cent,  gold  notes.  A  similar  company 
is  the  Foreign  Bond  &  Share  Corporation  organized  under 
the  laws  of  Delaware  in  1919.  This  company  combines 
the  investment  and  financing  functions.  It  is  identified 
with  a  number  of  American  private  banking  houses,  and 
finances  government  and  private  undertakings  in  Central 
and  South  America  and  the  Far  East.  While  it  is  primarily 
a  finance  company,  it  nevertheless  has  large  investments  in 
securities  which  serve  as  basic  capital  for  the  securities 
that  the  company  itself  issues  to  the  investing  public.  Its 
capital  stock  consists  of  3,000  shares  of  no  par  value  and 
$10,000,000  of  par  value  common. 

Another  company,  very  similar  to  the  latter,  is  the  Ameri- 
can International  Corporation,  organized  in  1915  under  the 
laws  of  New  York  primarily  to  promote  American  foreign 


INVESTMENT    COMPANIES  301 

trade.  Its  activities  up  to  1920,  however,  have  been  largely 
confined  to  investments  in  more  or  less  speculative  securi- 
ties. It  has  large  blocks  of  the  International  Mercantile 
Marine  Company,  the  United  Fruit  Company,  the  United 
States  Rubber  Company,  the  New  York  Shipbuilding  Cor- 
poration, the  Pacific  Mail  Steam  Ship  Company,  and  the 
Simms  Petroleum  Company.  The  authorized  capital  stock 
—  following  English  practice  of  issuing  founders'  shares  to 
the  managers  — is  divided  into  $1,000,000  of  ''Managers' 
shares  "  which  are  7  per  cent,  limited  participating  pre- 
ferred stock  and  $49,000,000  common  stock. 

However,  the  number  of  pure  investment  companies  in 
the  United  States  is  exceedingly  small  in  comparison  with 
those  in  Great  Britain.  Neither  among  the  several  hundred 
thousand  corporations  nor  among  the  numerous  New  Eng- 
land trusts  do  we  find  more  than  perhaps  a  score.  Indeed, 
with  us,  investment  appears  to  be  a  consideration  secondary 
to  control  and  assumption  as  ends  sought  to  be  accom- 
plished through  participation  by  means  of  substitution  of 
securities.  For  the  most  part,  the  holding  of  securities  for 
investment  purposes  in  this  country  has  been  undertaken 
by  the  great  insurance  and  trust  companies.  Several  states, 
notably  New  York,  1906,  passed  laws  requiring  insurance 
companies  to  dispose  of  some  classes  of  stocks,  but  the 
time  limit  set  for  this  has  several  times  been  extended,  and 
in  1920,  these  companies  still  held  nearly  $150,000,000  in 
such  stocks.  Private  banks  also  hold  very  large  quantities 
of  securities,  but  only  in  small  part  as  pure  investments. 
The  federal  banks,  too,  perform  the  same  function  to  a 
less  degree  and  indirectly  in  so  far  as  they  accept  stocks 
and  bonds  as  security  for  loans. 

Investment  Companies  in  Other  Countries.  —  In  con- 
tinental Europe  the  investment  company  is  also  to  be 
found;  but  it  is  chiefly  restricted  to  France  and  Holland. 
In  Belgium  there  are  a  few  finance  companies  that  assume 


302  COMBINATION    ORGANIZATIONS 

the  investment  function  as  a  side  line,  represented  by  such 
banking  companies  as  the  Societe  generale  de  Belgique  and 
the  Banque  Beige  dc  chemins  de  fer.  Those  in  Germany 
are  inconsequential. 

Criticism.  —  In  theory,  the  investment  company  is  in  a 
position  to  render  a  valuable  service  to  small  investors  by 
eliminating  excessive  risk  from  investment  in  securities; 
but  in  practice  this  theory  seldom  works  out  in  such  a  way 
as  to  be  entirely  satisfactory.  This  is  due,  not  to  any 
inherent  weakness  of  the  investment  priciple,  but  merely 
to  the  fact  that  any  type  of  ownership  organization  in  busi- 
ness must  be  run  by  man,  who  is  not  infallible  in  his 
judgment  of  the  future  value  of  business  undertakings. 
Another  weakness  militating  against  proper  insurance  of 
small  investors  who  buy  securities  of  investment  companies 
lies  in  the  fact  that  these  companies  are  private  under- 
takings usually  operated  by  those  who  manage  them,  and 
who  look  first  to  their  own  private  profit.  This  feature  is 
emphasized  by  the  extensive  use  of  founders  and  managers 
shares  which  are  usually  held  by  those  persons  who  were 
particularly  interested  in  promoting  such  companies.  Their 
stock  is  frequently  guaranteed  by  a  first  claim  to  a  fixed 
rate  of  dividend  and  on  assets  with  right  to  share  liberally 
in  extra  profits.  This  prospect  of  extra  profit  and  security 
has  led  many  managers  of  investment  companies  to  put 
the  capital  into  speculative  securities,  which  as  frequently 
as  not  prove  unprofitable.  For  these  reasons  it  is  open  to 
serious  doubt  whether  the  investment  company  really  does 
render  a  service  to  modern  industry  that  can  not  as  well 
be  left  to  the  individual  investor.  The  latter  is  no  better 
equipped  to  ascertain  the  value  and  stability  of  the  securi- 
ties isssued  by  investment  companies  than  of  those  issued 
by  operating  concerns.  It  would,  in  most  cases,  be  much 
safer  for  him  to  invest  in  the  stocks  of  the  big,  firmly  estab- 
lished industrials  and  railways,  or  in  government  bonds. 


CHAPTER  XVI 

PRINCIPLES    OF    CONTROL 

The  Instrumentalities  of  Control 

Control  over  one  ownership  organization  by  another, 
while  both  retain  their  separate  entities,  is  defined  in  a 
special  report  of  the  Interstate  Commerce  Commission  ^  as 
ability  to  determine  the  action  of  the  organization.  In 
explaining  what  constitutes  ability  to  determine  action, 
the  report  proceeds  to  enumerate  eight  conditions,  the 
existence  of  which  in  the  relations  between  two  or  more 
organizations  is  evidence  of  control.  These  may  be  re- 
classified according  to  the  instrumentalities  that  are  em- 
ployed to  establish  the  condition  of  control  in  the  following 
manner: 

I.  By  contracts  whereby  control  over  the  property  other  than 
the  instrumentalities  of  organization  is  secured,  namely,  by 
leaseholds  giving  the  controlling  organization 

1.  The  right  to  all  property  except  the  instrumentalities 
of  organization 

2.  The  right  to  all  such  property  except  money  and  choses 
m  action  other  than  securities  and 

3.  The  right  to  such  portion  of  the  tangible  property  as 
is  capable  of  being  employed  to  discharge  the  duties 
and  functions  of  the  organization. 

IT.  By    participation    through    ownership    of    securities    either 
in  the  form  of 
A.  Voting  control,  by  virtue  of 

1  Interstate  Commerce  Commi.-sion,  Special  Report  No.  1,  Wash- 
ington, D.  C,  1908,  p.  15. 

303 


304  COMBINATION    ORGANIZATIONS 

1.  The   right   to   exercise   the   major   part   of   the   voting 
power  attached  to  the  securities 

2.  The  right  to   name  the  major  part  of  the  board  of 

directors  or  managers,  whether  by  virtue  of  a  voting 
trust  agreement  or  otherwise,  or 

B.  Foreclosure  control,  by  virtue  of 

1.  The  right  to  foreclose  a  lien  upon  all  the  property  of 
the  organization 

2.  The  right  to  foreclose  a  lien  upon  the  major  part  of 
the  property. 

III.  By  agreements  creating  the  right  to  determine  the  action  of 
the  organization  in  some  specified  respect  or  respects. 

Control  established  by  contract  is  not  dependent  upon 
any  specialized  form  of  organization,  but  may  be  instituted 
by  any  of  the  forms  of  ownership  that  have  thus  far  been 
described,  namely,  by  the  personal  ownership,  the  primary 
securities-issuing  and  the  securities-substitution  types. 
Because  of  its  versatility  it  is  difficult  to  assign  contract 
control  to  its  proper  place-  However,  since,  in  practice, 
it  is  most  frequently  found  to  be  used  in  conjunction  with 
participation  company  organizations,  it  seems  to  be  more 
logical  to  describe  it  in  connection  with  that  type  than 
any  other. 

Participation  control  is  by  far  the  most  common  type  to 
be  found  in  this  country,  where  it  is  used  to  such  an  extent, 
through  the  instrumentality  of  the  holding  corporation,  that 
control  may  bo  said  to  be  the  chief  use  made  of  that  form 
of  organization. 

Control  by  agreement  includes  several  types  of  arrange- 
ments ranging  from  informal  inter-organization  agreements 
to  formal  agreements  creating  such  forms  of  organization 
as  associations,  pools  and  kartells.  These  seldom  result 
in  so  complete  a  control  over  the  organizations  affected  as 
is  possible  under  the  first  two  classes. 


PRINCIPLES    OF    CONTROL  305 

Contract    Control 

In  no  other  field  of  enterprise  is  control  through  contract 
of  leasehold  so  common  as  among  the  American  railroads. 
There  is  scarcely  a  single  great  railroad  system  that  has 
not  at  least  in  part  employed  this  method  of  control  to 
build  up  and  to  consolidate  its  railway  mileage.  This 
condition  arises  from  several  circumstances.  In  the  first 
place,  railways,  like  all  transportation  enterprises,  are  very 
often  dependent  upon  one  another  for  business.  A  given 
company  may  operate  a  section  of  line  connecting  two 
other  roads  while  most  of  its  business  originates  in  sections 
of  the  country  that  it  does  not  reach.  Again,  in  certain 
sections  of  the  country,  especially  in  the  North  and  the 
South,  there  are  innumerable  short  lines  that  serve  merely 
as  feeders  to  main  line  companies.  These  frequently  lack 
complete  equipment  and  are  economically  dependent  upon 
the  larger  companies  in  this  particular.  It  is  only  natural 
under  such  circumstances  that  the  larger  companies,  oper- 
ating great  systems,  should  seek  to  secure  this  additional 
trackage  for  their  own  use  without  incurring  the  expense 
of  purchasing  it  or  acquiring  the  companies  that  own  it. 
As  a  result,  they  lease  such  properties  on  an  annual  rental 
basis  for  long  periods  of  time. 

In  the  second  place,  a  railroad,  as  are  all  public  utilities, 
is  practically  a  natural  monopoly.  Two  railways  can  not 
well  serve  the  same  territory  and  return  profit  on  their 
investment.  Over  long  distances,  it  is  true,  they  compete, 
as  in  the  case  of  roads  running  from  New  York  City  and 
Philadelphia  to  Chicago,  and  from  Chicago  to  the  Puget 
Sound.  But  between  these  terminal  points  there  is  very 
little  competition.  As  a  result  of  this  characteristic,  the 
urge  is  extremely  strong  to  acquire  the  use  and  control  of 
roads  already  built  rather  than  to  build  new  ones.  Here 
the  leasehold  offers  the  simplest  solution. 


306  COMBINATION    ORGANIZATIONS 

The  most  prominent  example  of  leasehold  control  iu  this 
country  is  to  be  found  in  the  Southern  Pacific  railway- 
system.  In  1894,  the  Southern  Pacific  Company  secured 
from  the  Central  Pacific  Railroad  Company,  through  a 
90  year  lease,  control  over  all  of  the  properties,  including 
2,289  miles  of  line  of  the  latter  company.  It  pays  for 
this  right  a  fixed  rental  of  $10,000  per  year  and  out  of 
the  net  profit,  after  operating  expenses,  maintenance  and 
interest  charges  have  been  paid,  6  per  cent  on  the  capital 
stock  to  the  lessor  company.  If  earnings  exceed  that 
amount  the  surplus  is  divided  equally  between  the  two 
companies.  In  1914,  the  arrangement  was  attacked  by  the 
Department  of  Justice  as  contravening  the  provisions  of 
the  Sherman  Anti-Trust  Act,  but  the  decision  of  the  court 
upheld  the  agreement  as  lawful. 

As  illustrative  of  the  continued  existence  of  the  legal 
entity  of  the  lessor  organization  under  such  agreements, 
it  is  well  to  point  out  that  the  Central  Pacific  Railroad 
Company  was  reorganized  without  disturbing  the  control 
over  its  properties  by  the  Southern  Pacific  Company.  In 
1899,  the  original  lessor  company  was  dissolved  and  the 
title  to  its  properties  was  acquired  by  the  Central  Pacific 
Railway,  organized  in  that  year  in  the  state  of  Utah. 

Most  of  the  railway  companies  operating  in  the  North- 
eastern part  of  the  country  have  leased  the  lines  of  many 
smaller  companies.  The  Delaware,  Lackawanna  and 
Western  Railroad  Company  in  this  way  controls  some  14 
companies  with  a  total  mileage  of  702.6  miles.  The  larger 
units  among  these  companies  are  the  New  York,  Lacka- 
wanna &  Western  Railway,  214.4  miles,  the  Morris  and 
Essex  Railroad,  119  miles,  the  Utica,  Chenango  and  Sus- 
quehanna Valley  Railroad,  97  miles,  and  the  Syracuse, 
Binghamptom  and  New  York  Railroad  with  81  miles  of 
line. 

There  are  also  instances  where  the  leased  lines  comprise 


PRINCIPLES    OF    CONTROL  307 

practically  the  entire  plant  and  equipment  of  the  leasing 
company.  This  is  the  case  with  the  Cincinnati,  New 
Orleans  &  Texas  Pacific  Railway  Company,  organized  in 
Ohio  in  1881  for  the  purpose  of  taking  over  and  operating 
the  properties  of  the  Cincinnati  and  Southern  Railway 
This  railway  was  constructed  by  the  city  of  Cincinnati, 
which  leased  it  to  the  former  company  for  a  period  of  25 
years  in  1881.  In  1902,  the  lease  was  renewed  for  a  period 
of  60  years  from  the  date  of  expiration  of  the  original  lease. 
The  city  derives  an  income  of  somewhat  over  $1,100,000 
annually  as  rental  for  this  railway. 

Among  industrials  lease  control  is  found  to  be  as 
infrequent  as  it  is  frequent  among  railroads.  Where  it  is 
employed  by  them  it  is  usually  for  a  short  period  of  time 
with  an  option  to  buy  the  property  when  the  lease  expires. 
In  1919,  the  General  Motors  Corporation  controlled  the 
entire  plant  and  equipment  of  the  T.  W-  Warner  Company 
under  a  three  years'  lease  with  option  to  buy.  But  such 
examples  are  relatively  few  and  ordinarily  involve  property 
that  has  comparatively  small  value.  Industrial  under- 
takings, unlike  railways,  seldom  enjoy  a  natural  monopoly, 
and  even  their  legal  monopolies  secured  through  patents 
and  trade  marks  are  respectively  too  short-lived  and  too 
delicate  to  be  risked  by  giving  the  control  over  them  to 
others. 

By  and  large,  it  may  therefore  be  said  that  leasehold 
control  is  essentially  confined  to  industries  in  which  the 
factor  of  natural  monopoly  is  large.  These  would  include, 
railways,  public  utilities,  dockage,  wharf  and  terminal 
facilities,  and  mines. 

Participation    Control 

The  control  arrangements  effected  through  participa- 
tion are  all  based  upon  rights  that  vest  by  virtue  of  the 
ownership   of   securities.     Consequently,   this   method   of 


308  COMBINATION    ORGANIZATIONS 

control  may  be  brought  into  use  only  through  such  organ- 
izations as  possess  the  power  to  own  and  dispose  of  the 
securities  of  other  organizations.  But,  since  it  is  necessary 
to  provide  some  means  by  which  the  claim  on  income  and 
assets  acquired  by  the  participant  may  finally  be  vested 
in  natural  persons,  the  process  ordinarily  involves  the  sub- 
stitution of  the  securities  of  the  participant  control  organ- 
ization for  those  that  it  has  acquired.  There  are  but  two 
types  of  participation  organizations  that  have  been  exten- 
sively used  for  this  purpose.  These  are  the  trust  and  the 
holding  corporation.  The  joint  stock  company  is  rarely 
employed. 

Instruments  of  Participation  Control.  —  Control  exer- 
cised through  the  voting  power  attached  to  stocks  is  by  far 
more  common  than  any  other  method.  The  percentage  of 
stock  that  it  is  necessary  to  own  need  not  always  be  a  ma- 
jority, because  by  securing  a  sufficient  number  of  proxies 
it  is  a  simple  matter  to  secure  the  votes  without  owning  the 
stock.  Thus,  it  was  possible  for  the  New  York  Central 
and  Hudson  River  Railroad  Company  and  the  Pennsyl- 
vania Company,  in  1906,  to  control  the  Reading  Company 
through  subsidiaries,  although  together  they  owned  but  43.4 
per  cent  of  the  total  outstanding  stock  of  the  Reading 
Company. 

However,  through  a  proper  classification  of  stocks  it  may 
be  so  arranged  that  but  a  small  ownership  interest  is  neces- 
sary to  control  a  very  large  and  ramified  organization. 
This  method  may  properly  be  called  pyramided  control. 
For  example,  the  Rock  Island  Company  was  so  organized 
that  the  holders  of  but  $25,000,000  of  its  preferred  stock 
could  control  the  entire  Rock  Island  System  with  its 
15,000  miles  of  railway  and  its  $1,500,000,000  capitali- 
zation." This  was  possible  because  the  preferred  stock  was 
given  the  right  to  elect  the  majority  of  the  board  of  di- 
rectors. 

2  See  chart,  p.  314. 


PRINCIPLES    OF    CONTROL  309 

Provision  is  also  frequently  made  whereby  the  holder 
of  a  mortgage  bond  issue  shall  have  the  right  to  ap- 
point a  managing  director  for  the  debtor  company.  Thus, 
the  West  India  Sugar  Finance  Corporation,  organized  in 
Connecticut  in  1913  to  finance  sugar  corporations  in  the 
West  Indies  by  advances  secured  by  mortgages,  usually 
provides  in  its  indentures  for  control,  or  at  least  represen- 
tation upon  the  board  of  directors,  of  the  company  whose 
creditor  securities  it  assumes.  A  similar  provision  was 
made  when  the  old  United  States  Shipbuilding  Company 
was  organized  in  1902.  This  company's  capitalization 
consisted  of  $25,000,000,  common  and  $20,000,000  preferred 
stock,  and  $10,000,000  collateral  trust  bonds  plus  $14,- 
500,000  first  mortgage  bonds.  The  company  gave  $20,- 
000,000  of  common  stock  and  the  $10,000,000  collateral 
trust  bonds  to  acquire  the  Bethlehem  Steel  Company.  To 
give  control  to  the  former  Bethlehem  owners,  it  was  pro- 
vided that  these  bonds  should  have  the  same  voting  power 
as  $10,000,000  stock. 

The  voting  trust  has  also  been  employed  to  concentrate 
control  through  participation.  In  1906,  the  Interborough- 
Metropolitan  Company  w^as  organized  to  consolidate  the 
traction  systems  of  New  York  City.  It  acquired  practi- 
cally all  of  the  outstanding  stock  of  the  Metropolitan 
Traction  Company  through  the  New  York  Railways  Com- 
pany, the  Metropolitan  Securities  Company  and  the  Inter- 
borough  Rapid  Transit  Company.  For  several  years  fol- 
lowing its  formation  the  company  was  controlled  by  a 
voting  trust  consisting  of  A.  Belmont,  W.  Oakman,  Thos. 
Ryan,  C.  Vanderbilt  and  P.  Widener  who  owned 
$93,200,000  of  common  stock,  leaving  $45,700,000  of  pre- 
ferred stock  and  $67,800,000  of  bonds  outstanding  in  other 
hands. 

Foreclosure  control  is  not  uncommon,  for  it  is  customary 
to  provide  in  the  mortgage  indenture  that,  in  case  of  failure 


310  COMBINATION    ORGANIZATIONS 

of  the  company  to  pay  the  interest  on  bonds  when  due, 
the  bondholders  shall  have  the  right  to  take  over  the  con- 
trol and  operation  of  the  corporation  for  a  limited  period 
of  time,  usually  for  a  period  of  six  months.  Control  of 
this  kind,  however,  is  merely  temporary.  Thus,  the 
Southern  Railway  Company,  in  1906,  controlled  the  Macon 
and  Birmingham  Railway  Company  through  default  of 
the  latter  in  the  matter  of  interest  on  bonds  secured  by  its 
property  and  held  by  the  Southern  Railway  Company. 

A  similar  right  is  sometimes  given  to  preferred  and  de- 
benture stock,  examples  of  which  are  given  in  Part  VI  of 
the  text.  An  exceptional  use  of  this  type  of  securities  has 
been  made  in  the  organization  of  the  General  Motors  Cor- 
poration. This  corporation  had  outstanding  on  January  1, 
1920,  the  following  stocks: 

19,518,895  shares  non-par  value  common 
$16,183,400  6%  cumulative  preferred 
$16,489,500  6%  cumulative  debenture  stock 
$22,390,000  7%  cumulative  debenture  stock 

If  the  dividend  is  regularly  paid  on  the  preferred  and 
debenture  stock,  the  common  stockholders  retain  control; 
but  if  it  is  lapsed  on  any  of  the  other  classes  for  more  than 
six  months,  the  holders  of  that  class  take  over  the  control. 
The  corporation  itself  is  reported  to  be  controlled  by  E.  I. 
du  Pont  de  Nemours  and  Company  through  its  subsidiary, 
the  Du  Pont  American  Industries  Company,  largely  through 
common  stock  holdings.  Thus,  a  lapsing  of  the  dividend 
on  any  other  class  of  stock  would  shift  the  control  of  the 
General  Motors  Company  from  the  du  Pont  Company. 

Modes  of  Participation  Control.  —  Inter-organization 
control  through  participation  may  be  either  sole  or  joint, 
namely,  by  a  single  organization  or  by  several;  and  direct 
or  indirect,  that  is,  without  the  use  of  an  intermediary  or 
with  one.     There  are,  then,  four  modes  of  control:   (1)  sole 


PRINCIPLES    OF    CONTROL  311 

direct,  (2)  sole  indirect,  (3)  joint  direct,  (4)  joint  in- 
direct. The  terms  "  joint  "  control  and  "  indirect  "  control 
require  some  further  explanation;  the  others  are  self- 
explanatory. 

Joint  Control.  Where  joint  control  exists,  it  is  fre- 
quently difficult  to  determine  whether  participation  in  the 
controlled  organization  is  solely  for  investment  or  primarily 
for  control.  Thus,  the  Lehigh  and  Hudson  River  Railroad 
Company,  with  an  outstanding  capital  stock  of  $1,340,000, 
in  1906,  reported  its  stock  to  be  held  by  the  Lehigh  Coal 
and  Navigation  Company,  the  Central  Railroad  Company 
of  New  Jersey,  the  Delaware,  Lackawanna  &  Western  Rail- 
road Company,  the  Erie  Railroad  Company  and  the  Penn- 
sylvania Railroad  Company.  But  of  the  six  companies, 
only  the  Erie  conceded  the  relationship  to  be  that  of  joint 
control,  the  others  claiming  that  it  was  of  the  nature  of  an 
investment.^  Similar  joint  control  by  numerous  railroads 
is  to  be  found  in  most  union  station  and  terminal  railway 
projects. 

The  fact  that  minority  holdings  are  often  in  a  position 
to  control  results  in  some  peculiarly  complex  situations  in 
cases  of  joint  control.  In  1906,  the  Des  Moines  Union  Rail- 
way Company  is  reported  to  have  been  jointly  controlled 
by  the  Chicago,  Milwaukee  &  St.  Paul  Railway  Company, 
the  Wabash  Railroad  Company  and  F.  M.  Hubbell,  Son  & 
Company,*  in  spite  of  the  fact  that  the  latter  company 
owned  five  eighths  of  its  stock.  The  St.  Paul  owned  only 
two  eighths  and  the  Wabash  one  eighth.  Under  the  char- 
ter of  the  Des  Moines  Company  it  required  at  least  seven 
eighths  of  the  outstanding  stock  to  elect  a  director,  to 
amend  the  charter,  or  to  increase  the  capitalization. 
Hence,  the  smallest  stockholder  was  as  much  in  control  as 
the  other  two  combined. 

^  Interstate  Commerce  Commission,  Special  Report  No.  1,  Wash- 
ington, 1908. 
*  Ibid. 


312         COMBINATION    ORGANIZATIONS 

Indirect  Control.  This  method  of  control  results  in  ex- 
treme complexity  of  inter-relation  between  ownership  or- 
ganizations. It  may  be  instituted:  (1)  Through  one  or 
more  intermediary  holding  companies;  (2)  through  a 
trustee  or  an  individual  or  individuals  in  a  fiduciary  ca- 
pacity with  respect  to  the  controlling  company;  (3) 
through  a  so-called  "  family  interest  "  heavily  interested 
in  the  companies  concerned;  and  (4)  through  fictitious  or 
non-existing  persons. 

(1)  Control  through  intermediary  com-panies.  Where 
an  intermediary  company  is  employed  to  effect  control, 
such  a  company  must  have  the  power  to  hold  the  securities 
of  other  companies.  This  is  the  means  used  by  E.  I.  du 
Pont  de  Nemours  &  Company  in  its  control  over  the  Gen- 
eral Motors  Corporation,  itself  a  holding  company  control- 
ling some  55  companies  and  holding  an  important  interest 
in  18  others.  In  1917,  the  du  Pont  concern  acquired  27 
per  cent  of  the  stock  of  the  General  Motors  and  the  Chev- 
rolet Motor  Company.  The  latter  was  subsequently  ac- 
quired by  the  General  Motors.  In  1918,  the  Du  Pont 
Company  caused  the  Du  Pont  American  Industries  Com- 
pany to  be  formed  and  transferred  to  this  subsidiary  its 
holdings  in  the  General  Motors.  In  1920,  the  Du  Pont 
American  Industries  Company  acquired  by  purchase  from 
the  Durant  interests  what  was  reported  to  be  a  majority  of 
the  outstanding  common  stock  of  the  General  Motors, 
thereby  giving  control  oVer  the  whole  organization  to  E.  I. 
du  Pont  de  Nemours  &  Company. 

The  United  States  Steel  Corporation  also  is  built  up  after 
this  same  manner.  Through  its  11  great  intermediary 
liolding  companies,  this  corporation  controls,  chiefly 
through  ownership  of  all  outstanding  stock,  nearly  150 
other  companies.  The  five  great  packers  have  made  ex- 
tensive use  of  this  principle  in  acquiring  control  over  some 
669  concerns. 


PRINCIPLES    OF    CONTROL  313 

By  successively  placing  one  intermediary  holding  com- 
pany in  control  of  another,  it  is  possible  to  build  up  the 
famous  pyramided,  or  progressive,  control  that  was  so 
successfully  used  by  a  small  group  of  financiers  in  the 
Rock  Island  Railroad  System  and  in  the  Atlantic  Coast 
Line,  shown  in  the  accompanying  chart  outlining  the  inter- 
corporate control  as  it  was  in  1906.  The  Rock  Island 
Company  at  that  time  had  outstanding  $49,956,880  in  pre- 
ferred stock,  which  had  the  right  to  name  the  majority  of 
the  board  of  directors.  Control  of  the  system  therefore 
lay  in  the  hands  of  those  who  owned  a  majority  of  this  class 
of  stock.  In  the  Atlantic  Coast  Line  Company,  an  owner- 
ship of  slightly  more  than  $5,000,000  of  the  stock  of  that 
company  controlled  solely  and  jointly  through  ownership 
and  lease  a  railway  system  over  11,000  miles  in  extent, 
with  a  total  capitalization  of  over  $725,000,000.  (See 
page  314). 

(2)  Control  through  trustees  or  fiduciaries.  Where  a 
holding  company  owns  the  controlling  securities  of  another, 
it  may  turn  these  securities  over  to  trustees  as  a  trust  es- 
tate, with  itself  as  beneficiary.  If  the  trust  agreement  is 
properly  drawn  up,  the  holding  company  may  then  control 
the  other  by  naming  trustees  who  carry  out  its  will.  This 
practice  was  found  by  the  Interstate  Commerce  Commis- 
sion ^  to  have  been  used  in  a  number  of  instances  by  rail- 
road companies.  It  serves  to  cover  up  the  true  relation 
of  control.  More  recently  the  Federal  Trade  Commission 
has  uncovered  numerous  instances  where  one  or  more  of  the 
five  great  packing  companies  have  used  trusted  individuals 
to  hold  controlling  interests  in  other  companies  for  them 
in  a  fiduciary  capacity.'^  Such  individuals  are  called 
"  dummy  stockholders."  The  report  of  the  Commission 
says,  "  Every  one  of  the  five  big  packing  companies  prac- 

5  Ibid  p.  19. 

^  Report  on  the  Meat-Packing  Industry,  Part  I,  pp.  264,  et.  seq. 


314 


COMBINATION'   ORGANIZATIONS 


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PRINCIPLES    OF    CONTROL  315 

tices  it  to  a  greater  or  less  extent.  Even  those  whose  State 
of  incorporation  permits  direct  holdings  have  subsidiary- 
companies  whose  stock  is  held  in  the  name  of  a  trusted 
employee  or  attorney,  or  other  party  for  the  benefit  of  the 
primary  company. 

"  Similarly  stock  investments  by  the  individual  members 
of  the  packer  families  or  by  the  family  estates  are  fre- 
quently held  by  dummies. 

"  The  common  practice  in  the  case  of  dummy  holdings 
is  to  record  on  the  subsidiary  or  affiliated  company's  stock 
books  the  name  of  the  dummy  as  a  stockholder  of  record 
and  to  direct  him  to  assign  the  stock  in  blank  to  the  parent 
company  or  other  person  designated  by  the  parent  com- 
pany, or  to  the  members  of  the  family  who  are  the  true 
owners.  The  stockholder  of  record,  therefore,  is  the 
dummy,  either  a  clerk  or  a  confidential  man  of  the  real 
owners  who  directs  the  voting  of  the  stock  and  receives  all 
dividends." 

In  this  way.  Swift  &  Company  and  Armour  &  Company 
were  reported  to  hold  50.3  per  cent  of  the  stock  of  the 
Record  Stockman  Publishing  Company  of  Denver;  the 
former  through  one  H.  A.  Chetham,  and  the  latter  through 
one  Guy  S-  Bailey,  whose  names  appeared  as  stockholders 
of  record.  It  was  in  this  way,  also,  that  the  Morris  in- 
terests concealed  their  control  over  the  Kansas  City  Stock 
Yards  Company.  The  bulk  of  the  stock  of  the  latter  com- 
pany was  recorded  as  being  owned  by  E.  V.  R.  Thayer  and 
Roy  A.  Hitchings,  but  was  assigned  by  them  in  blank  and 
turned  over  to  the  Estate  of  Edward  Morris. 

(3)  Control  through  fajnily  interest  and  individual 
holdings.  While  this  method  of  control  does  not  involve 
participation  by  one  company  in  another,  it  nevertheless 
is  of  sufficient  importance  to  demand  a  word  of  explanation. 
Family  interests  are  sometimes  turned  into  trust  estates 
by  testament,  as  in  the  case  of  the  estate  of  Jay  Gould  and 


316  COMBINATION    ORGANIZATIONS 

of  Edward  Morris.  These  estates,  for  all  practical  pur- 
poses, perform  the  same  function  as  a  holding  company, 
in  so  far  as  control  over  other  companies  whose  securities 
they  hold  is  concerned.  While  they  do  not  provide  a 
direct  line  of  control  descending  from  a  control  company 
through  the  estate  to  the  company  that  the  latter  controls, 
they  still  create  a  community  of  interest  resulting  in  such 
close  cooperation  that  it  frequently  partakes  of  the  nature 
of  control. 

Thus,  the  International  and  Great  Northern  Railroad 
Company  has  commonly  been  considered  to  be  part  of  the 
Missouri  Pacific  System.  The  only  binding  link  between 
it  and  the  Missouri  Pacific  Railway  Company  was  through 
the  estate  of  Jay  Gould.  This  estate,  in  1906,  was  reported 
to  own  $20,215,000  out  of  $77,407,860  of  the  outstanding 
stock  of  the  Missouri  Pacific  and  practically  all  of  the  out- 
standing stock  of  the  International  and  Great  Northern. 

Family  control,  according  to  the  Federal  Trade  Com- 
mission's Report  on  the  Meat-Packing  Industry,  is  very 
common  with  Swift  &  Company,  Morris  &  Company  and 
Armour  &  Company.  The  controlling  interest  in  these 
three  companies  is  very  closely  held,  respectively,  by  the 
Swift,  Morris  and  Armour  families.  Through  family  in- 
terests these  packers  are  listed  as  controlling  nearly  50 
companies,  some  of  which  are  more  or  less  unrelated  to  the 
packing  business.  Armour  &  Company  controls  the 
Armour  Grain  Company  through  a  family  interest  of  87 
per  cent  of  that  company's  $1,000,000  voting  stock.  And 
the  Armour  Grain  Company  in  turn  controls  through  stock 
ownership  5  other  companies. 

(4)  Control  through  fictitious  persons.  In  instances 
where  the  relation  of  control  is  sought  to  be  concealed, 
fictitious,  or  non-existing  persons,  have  sometimes  been 
recorded  on  the  stock  books  of  the  controlled  company  as 
the  stockholders  of  record.     Thus,  the  Federal  Trade  Com- 


PRINCIPLES    OF    CONTROL  317 

mission  reports  that  the  Chicago  Bearing  Metal  Company 
which  manufactures  certain  supplies  for  railroad  use  is 
controlled  by  the  Swifts  and  affiliated  interests.  Among 
the  stockholders  of  record  were  L.  V.  Robinson  and  H.  B. 
Natches,  care  of  C.  F.  Stephenson,  of  Swift  &  Company 
and  L.  R.  Poor,  address,  Union  Stock  Yards,  Chicago. 
Replies  to  questionnaires  sent  out  by  the  Commission  to 
these  names  were  made  by  C.  F.  Stephenson,  an  employee 
of  Edward  F.  Swift,  who  in  each  case  attached  a  memoran- 
dum that  there  were  no  such  persons,  and  stated  that  "  Mr. 
Edward  F.  Swift  is  now  and  at  all  times  has  been  the  owner 
of  this  stock."  ^ 

It  is  now  clear  that  there  may  appear  in  a  single  control 
organization  a  great  variety  of  ways  in  which  control  may 
be  established.  The  four  modes  of  control  with  their  sev- 
eral variations  may  of  course  be  multiplied  by  the  several 
distinct  instrumentalities  employed  to  institute  the  control. 
The  closer  the  control  organization  comes  to  a  direct 
violation  of  federal  and  state  laws  against  monopoly  and 
restraint  of  trade,  the  greater  will  be  the  care  exercised 
to  conceal  the  true  condition  of  control. 

It  remains  but  to  describe  a  few  representative  types  of 
control  companies,  in  order  to  show  the  great  flexibility 
of  this  form  of  participation  organization. 

7  Ibid,  p.  269. 


CHAPTER  XVII 

CONTROL    COMPANIES 

A.    Trusts   as   Control   Companies 

Prior  to  the  year  1888,  when  the  state  of  New  Jersey 
first  adopted  a  general  law  giving  to  its  corporations  the 
power  to  hold  the  securities  of  other  corporations,  control 
tlirough  participation  could  be  brought  about  only  through 
the  joint  stock  company  and  the  trust  form  of  organiza- 
tion. The  holding,  or  combination  trust,  was  the  favorite 
form  employed  and  proved  itself  admirably  adapted  to 
this  work.  Under  it  the  parties  to  the  Standard  Oil  Trust 
Agreement,  of  1882,  brought  together  under  a  single  unified 
control  the  varied  interests  of  individual  proprietorships, 
partnerships,  joint  stock  companies  and  corporations. 
Nowhere  in  the  organization  was  the  holding  corporation 
used. 

This  famous  trust  was,  however,  merely  a  reorganization 
of  an  earlier  one  created  by  the  members  of  the  Standard 
Oil  Group,  in  1879.  The  conception  of  the  idea  of  using 
the  trust  form  for  control  and  combination  purposes  has 
quite  generally  been  attributed  to  S.  C.  T.  Dodd,  the 
attorney  for  the  Standard  Oil  Company  of  Ohio. 

Between  the  years  1880  and  1890  a  number  of  large 
trusts  were  formed,  most  of  them  patterned  after  the 
Standard  Oil  Trust.  In  1884,  the  American  Cotton  Oil 
Trust,  embracing  some  eighty-five  concerns  doing  business 
throughout  the  South  was  formed  in  the  state  of  Arkansas. 
In  1887,  the  Distillers'  and  Cattle  Feeders'  Trust,  the 
National  Lead  Trust  and  the  Sugar  Refineries  Company 
were  formed.  These  were  popularly  known  as  the 
"  Whiskey,"  "  Lead  "  and  "  Sugar  "  Trusts. 

318 


CONTROL    COMPANIES 


319 


The  legal  principles  governing  trusteeship  have  already 
been  explained.  These  apply  with  equal  force  to  a  simple 
as  well  as  to  a  complex  trust.  However,  since  the  trusts 
here  under  consideration  involve  participation  in  other 
organizations  that  retain  their  distinct  entity,  a  few  words 
of  explanation  concerning  them  will  not  be  amiss. 

The  Standard  Oil  Trust  of  1882.^  —  This  trust  because 
of  the  complexity  of  its  organization  brings  out  more 
clearly  than  any  of  the  others  the  nature  of  the  organiza- 
tion and  the  transactions  involved  in  constituting  it.  The 
accompanying  chart  is  a  diagrammatic  sketch  of  this  trust. 


DIAGRAM  ILLUSTRATING  THE  TRANSACTIONS  INVOLVED 
IN  FORMING  THE  STANDARD  OIL  TRUST  OF  1882 


Tr}>Si- 


Cert/f/C^/-, 


4 
and  Grou/oji; 

2 

■OUf!l GorfiS.  to 


^C^S^c/  O'^ Pos  /»  S)^oc/rho/c/ers, 


IncJii/ic/u^/S^ridP-^r/^ners 


GROUPH 
ASSOCIATIONS  ~"~-- 


' Group  lAssns  and  I 
Sf-d.  Oi/  Cos. 

- 2 

'''yCos.dfyd  Groups  ASsnS- 

5 
The  fieai/y  margins  'no//cafe  fhe  unif-s  fhaf  re/nair)  gffer  ^ormaf/On  offhe  Trust  and 

the  do  f ted  Jines  /ead/rjff  to  tnem  ^hour  contro/  Ac/  f-tie  Board  of  Trustees. 
TTie  assets,  etc.  of  indiiyidt/g/s,  p^rtrters  ^rjd  Grour>  Z  corporations  and  associations 
haue  been  transferred  to  ttJe  ^tsnctgrd  Od  t^omfisnies  and tne units  dissott/ed. 
The  figures  indicate  tne  order  of  trar7Sactior)s  Jbegipniny  a/itt?  farm^fion  of  -^d  O/t  Cos. 

AH  STOCtrO£f?. 

*  A  copy  of  this  trust  agreement  will  be  found  in  Part  VI  of  the 
text,  pp.  5G0-571. 


320  COMBINATION    ORGANIZATIONS 

The  parties  to  the  agreement,  who  were  the  settlors  of  the 
properties  upon  the  board  of  trustees,  were  divided  into 
three  ckisses,  namely:  (1)  All  stockholders  and  members  of 
14  named  corporations  and  limited  partnerships;  (2)  some 
46  named  individuals;  and  (3)  a  portion  of  the  stockholders 
and  members  of  27  named  corporations  and  limited  part- 
nerships.- It  was  then  further  provided  that  a  Standard 
Oil  Company  should  be  formed  in  each  of  the  four  states 
of  Ohio,  New  York,  New  Jersey  and  Pennsylvania;  but 
the  Ohio  company  already  existed.  The  settlors  of  Classes 
1  and  2  were  thereupon  to  convey  all  of  the  property,  real 
and  personal,  assets,  and  business  mentioned  and  embraced 
in  certain  schedules  to  the  Standard  Oil  Companies  in  ex- 
change for  the  stocks  of  these  companies  whose  par  value 
ecjualed  a  fair  valuation  of  the  properties.  The  former 
stockholders,  partners  and  individuals  thus  became  stock- 
holders of  the  Standard  Oil  Companies.  They  were  then 
to  turn  this  stock  over  to  the  board  of  trustees  and  receive 
in  return  Standard  Oil  Trust  Certificates  of  equal  value. 

These  transactions  necessitated  the  dissolution  of  some 
of  the  original  organizations.  This  was  easily  accomplished 
in  the  case  of  settlors  of  classes  1  and  2.  However,  with 
class  3,  where  the  signers  of  the  agreement  comprised  but 
part  of  the  stockholders  and  partners,  the  entity  of  the 
organizations  had  to  be  preserved.  Hence,  it  was  provided 
that  the  stockholders  and  partners  of  this  class  should 
deposit  their  securities  directly  with  the  trustees.  But 
this  arrangement  was  changed  by  a  supplementary  agree- 
ment entered  into  a  few  days  later  by  virtue  of  which  the 
trustees  were  given  authority  to  decide  which  companies 
should  be  dissolved  and  their  assets  absorbed  by  the 
Standard  Oil  Companies  and  which  should  remain  under 
the  direct  control  of  the  trustees.     This  latter  classification 

2  The  organizations  called  limited  partnerships  were  largely 
special  joint  stock  companies. 


CONTROL    COMPANIES  321 

has  been  employed  in  the  diagram  where  Group  I  corpora- 
tions and  associations  represent  those  that  were  dissolved 
and  Group  II  those  taken  over  directly. 

After  all  transactions  had  been  completed  there  re- 
mained under  control  of  the  board  of  trustees  the  four 
Standard  Oil  Companies,  Group  II  Corporations  and 
Group  II  Associations,  all  other  organizations  having  been 
dissolved. 

The  Whiskey  Trust  — In  the  Distillers'  and  Cattle 
Feeders'  Trust  the  procedure  was  somewhat  different. 
Among  the  settlors  were  corporations  and  ordinary  partner- 
ships. In  order  to  simplify  the  control  it  was  provided  that 
"  the  parties  hereto  who  are  not  corporations  shall  become 
such  before  this  deed  takes  effect."  It  is  also  provided 
that  "  the  several  corporations,  parties  to  this  agreement, 
shall  maintain  their  separate  organization,  and  each  shall 
carry  on  and  conduct  its  own  business.  .  ,  .  The  capital 
stock  of  each  corporation  shall  be  transferred  to  the  board 
(of  trustees)  and  in  lieu  of  the  same,  certificates  not  ex- 
ceeding fifty  millions  of  dollars,  divided  into  five  hundred 
thousand  shares,  each  of  one  hundred  dollars,  shall  be 
issued  by  the  board  and  distributed  as  hereinafter 
provided." 

Legal  Status.  —  The  further  spread  of  this  form  of  trust 
organization  was  checked  through  action  taken  by  several 
of  the  states  and  the  United  States.  It  was  at  first  attacked 
as  an  agreement  illegal  under  the  common  law;  the  gen- 
eral contention  being,  that  corporations  committed  an  act 
ultra  vires  by  giving  the  power  of  management  and  control 
over  to  a  board  of  trustees.  In  1887,  the  state  of  Louisiana 
attacked  the  American  Cotton  Oil  Trust  on  this  point. 
Shortly  thereafter  the  state  of  New  York  brought  suit 
against  the  North  River  Sugar  Refining  Company  to  force 
it  out  of  the  Sugar  Trust,  and  in  1890,  the  state  of  Ohio 
began  an  action  against  the  Standard  Oil   Company   of 


322  COMBINATION    ORGANIZATIONS 

Ohio  that  finally  resulted  in  the  dissolution  of  the  Standard 
Oil  Trust. 

In  the  Ohio  case  the  court  held,^  that,  while  the  corpora- 
tion is  a  separate  entity  from  its  stockholders,  this  fiction 
will  be  upheld  only  so  long  as  a  proper,  harmless  use  is 
made  of  it;  but  that  in  the  case  of  the  Standard  Oil  Com- 
pany, the  act  of  the  stockholders  in  giving  the  control  over 
the  corporation  to  the  board  of  trustees  constituted  an 
act  of  the  corporation  and  hence  was  null  and  void  because 
such  an  act  was  beyond  the  power  of  the  corporation.  In 
the  second  place,  it  held  that  "  its  object  was  to  establish  a 
virtual  monopoly  of  the  business  of  producing  petroleum, 
and  of  manufacturing,  refining  and  dealing  in  it  and  all  its 
products,  throughout  the  entire  country,  and  by  which  it 
might  not  merely  control  the  production,  but  the  price  at 
its  pleasure.  All  such  associations  are  contrary  to  the 
policy  of  our  states  and  void." 

The  second  phase  of  the  attack  against  trust  organiza- 
tions with  monopolistic  qualities  took  the  form  of  specific 
legislation  against  trusts,  pools,  agreements  and  conspira- 
cies in  restraint  of  trade.  Kansas  passed  such  an  act  in 
1889.  The  famous  Sherman  Anti-Trust  Act  was  enacted 
by  Congress  in  1890.  About  the  same  time,  Kentucky, 
Michigan,  North  Carolina  and  other  states  adopted  similar 
legislation.     By  1894,  some  twenty  states  had  such  laws. 

Present  Day  Holding  Trusts.  —  Today  the  combination 
or  control  trust  is  to  be  found  in  but  a  few  states,  notably 
in  Massachusetts.  The  component  elements  of  these  trusts 
ordinarily  are  not  corporations  but  usually  joint  stock 
companies  or  voluntary  associations.  They  are  to  be 
found  chiefly  among  the  public  utilities  cntorprises.  The 
Central  Massachusetts  Light  &  Power  Company,  a  trust 
formed  in  1912,  owns  the  entire  capital  stock  of  the  Black- 
stone  Electric  Light  Company,  the  Central  Massachusetts 

3  49  Ohio  St.  137;  30  N.  E.  279. 


CONTROL    COMPANIES  323 

Electric  Company,  the  Union  Light  and  Power  Company 
and  the  Ware  Electric  Company.  It  serves  23  Massa- 
chusetts towns.  The  Central  Massachusetts  Power  Com- 
pany, 1912,  and  the  Commonwealth  Gas  and  Electric 
Companies  are  similar  trusts.  The  Massachusetts  Light- 
ing Companies,  also  a  trust,  controls  through  ownership 
of  securities  some  eighteen  gas  and  electric  lighting  com- 
panies organized  as  voluntary  associations  and  two  cor- 
porations. 

B.    Holding   Corporations   as   Control 
Companies 

The  court  decisions  and  the  legislative  acts  making  the 
trust  an  illegal  type  of  control  organization  where  corpora- 
tions either  directly  or  through  their  stockholders  became 
parties  to  it,  came  at  the  time  when  it  was  possible  —  at 
least  under  the  laws  of  New  Jersey  —  to  employ  the  hold- 
ing corporation  for  the  same  purpose.  However,  its  gen- 
eral use  did  not  set  in  at  once,  but  dates  from  about  1897, 
namely,  with  the  beginning  of  the  period  of  industrial 
activity  following  the  depression  which  began  with  the 
panic  of  1893.  Since  that  time,  the  holding  corporation 
as  a  control  organization  has  become  a  firmly  established 
institution ;  and  it  is  today  the  form  of  ownership  organiza- 
tion under  which  the  great  business  establishments  of  the 
country  are  conducted.  It  is  now  quite  common  in  such 
fields  of  business  enterprise  as  the  construction  and  opera- 
tion of  railways,  street  and  interurban  railways,  gas  and 
electric  plants,  most  branches  of  manufacture  with  but 
few  exceptions,  in  the  petroleum  industry,  in  mining,  mill- 
ing and  smelting,  meat  packing,  telephone  and  telegraph 
services,  ocean  transportation  and  in  trade  and  commerce. 
Indeed,  it  may  well  be  called  the  highest  type  of  ownership 
organization  that  has  yet  been  developed  for  use  under  a 
system  of  private  enterprise. 


324  COMBINATION    ORGANIZATIONS 

The  holding  corporation  is  exceptionally  well  adapted 
for  the  institution  of  control  over  other  corporations  with 
the  greatest  facility.  It  lends  itself  readily  to  the  applica- 
tion of  the  several  instrumentalities  of  control  that  have 
been  enumerated  and  permits  of  the  use  of  the  many  differ- 
ent modes  of  control  that  have  been  described.  Conse- 
quently, a  large  holding  corporation  need  not  confine  itself 
to  a  single  instrumentality  or  mode  of  control,  but  may  em- 
ploy a  number  of  them  in  binding  together  the  several  com- 
ponent units  of  its  organization.  As  a  result  of  this 
diversification,  some  of  our  larger  business  organizations 
present  a  complexity  and  ramification  that  it  is  difficult 
to  grasp. 

In  the  accompanying  chart  is  shown  a  hypothetical 
control  organization  built  up  through  the  use  of  the  holding 
corporation  and  several  instrumentalities  and  modes  of 
control.  It  illustrates  merely  some  of  the  possibilities 
that  present  themselves,  and  is  not  intended  to  depict  any 
actual  corporation.  However,  it  is  not  overdrawn,  since 
most  of  the  methods  of  control  there  employed  may  be 
found  in  the  Federal  Trade  Commission's  Report  on  the 
Meat  Packing  Industry,  published  in  1919,  and  likewise 
in  the  special  report  on  Intercorporate  Relations  Among  the 
American  Railway  Companies  issued  by  the  Interstate 
Commerce  Commission  in  1908. 

In  order  to  present  clearly  the  effect  of  such  control 
organizations  upon  the  issuance,  substitution  and  distribu- 
tion of  securities,  the  following  statement  of  the  assets 
and  liabilities  of  the  twelve  hypothetical  corporations 
shown  in  the  chart  has  been  prepared. 


CONTROL    COMPANIES 


325 


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326 


COMBINATION    ORGANIZATIONS 


Summarized  Statement  of  Assets  and  Liabilities  of 
Companies  shown  in  the  Chart 


Liabilities 

Company 

Assets 

Amount 

By  whom 
held 

A 

$2,050,000  B  Stock 
3,000,000  C  Stock 
3,000,000  D  Stock 
3,000,000  J  Bonds 
1,000,000  K  Bonds 

S3,000,000  Stock 
6,050,000  Stock 
3,000,000  Bonds 

John  Smith 

Public 

Public 

B 

1,500,000  E  Stock 
550,000  G  Stock 

2,050,000  Stock 

Company  A 

C 

1,500,000  E  Stock 
2,500,000  Plant 

3,000,000  Stock 
1,000,000  Bonds 

Company  A 
Public 

D 

3,000,000  Plant 

3,000,000  Stock 

Company  A 

E 

3,000,000  Plant 

Lease  of  $2,000,000  E  Plant 

1,500,000  Stock 
1,500,000  Stock 

Company  C 
Company  B 

F 

2,000,000  Plant 

(Leased  to  E) 

2,000,000  Stock 

PubUc 

G 

2,000,000  H  Common  Stock 
1,050,000  Investments  in 
outside  concerns 

550,000  Pfd.  Stock 

500,000  Pfd.  Stock 

2,000,000  Com.  Stock 

Company  B 

Public 

Public 

H 

3,000,000  I  Stock 
2,000,000  Plant 

3,000,000  Pfd.  Non-Vot. 
2,000,000  Com.  Stock 

Public 
Company  B 

I 

5,000,000  Plant 

3,000,000  Stock 
2,000,000  Stock 

Company  H 
Public 

J 

8,000,000  Plant,  etc. 

5,000,000  Stock 
3,000,000  Bonds 

Public 
Company  A 

K 

3,000,000  Plant 

2,000,000  Stock 
1,000,000  Bonds 

Public 
Company  A 

L 

1,000,000  Plant 

600,000  Stock 
400,000  Stock 

John  Smith 
Public 

The  value  of  the  capital  underlying  the  securities  of  this 
hypothetical  control  organization  is  $30,550,000.  Upon 
this  real  basic  capital  as  supporting  value  a  grand  total  of 
$51,150,000  in  securities  consisting  of  $43,150,000  of  stocks 
and  $8,000,000  of  bonds  has  been  issued.  Of  the  stocks 
the  public;  holds  $22,950,000  and  of  the  rest,  $16,600,000 
is  held  by  the  various  companies  and  $3,600,000  by  John 
Smith,  while  the  bonds  are  equally  distributed  between 
the  companies  and  the  public.     In  all,  then,  the  companies 


CONTROL    COMPANIES  327 

hold  $20,600,000  of  the  securities,  the  public  $26,950,000 
and  John  Smith  $3,600,000.  The  amount  held  by  the  com- 
panies represents  the  extent  to  which  substitution  of  securi- 
ties has  been  employed  in  effecting  this  centralized  control. 
It  should  be  noted,  however,  that  the  control  of  the  whole 
organization  rests  in  the  hands  of  John  Smith  together 
with  such  other  persons  as  own  a  little  more  than  $1,050,000 
of  Company  A  stock ;  and  if  John  Smith  secures  the  proxies 
of  the  holders  of  these  shares,  he  is  in  a  position  to  exercise 
control.  The  same  result  could  be  more  permanently  ob- 
tained if  John  Smith  and  the  others  created  a  voting  trust 
of  their  majority  holdings  of  Company  A  stock. 

It  is,  therefore,  apparent  that  control  over  the  entire 
basic  capital  of  $30,550,000,  for  all  practical  purposes,  is 
in  the  hands  of  John  Smith,  although  he  has  invested  but 
$3,600,000  in  the  stocks  of  two  of  the  companies,  namely. 
Company  A  and  Company  L.  This  sum  represents  but 
one  fourteenth  of  the  total  amount  of  securities  issued 
and  but  little  more  than  one  eighth  of  the  total  basic 
capital.  Thus,  through  the  medium  of  substitution  of 
securities  and  the  use  of  the  control  company  may  the 
public  be  used  to  furnish  industrial  capital  while  those  who 
promote  the  enterprise  can,  with  but  a  relatively  small 
investment,  control  a  great  industry. 

The  Control  Corporation  Among  the  American  Rail- 
roads.—  Practically  each  one  of  our  great  railway  systems 
has  at  its  head  a  control  corporation.  The  New  York 
Central  Railroad  Company  holds  that  position  in  the 
Vanderbilt  System,  the  Pennsylvania  Company  in  the 
Pennsylvania  System,  the  Union  Pacific  Railroad  Com- 
pany in  the  old  Harriman  System,  the  Southern  Railway 
in  the  Morgan  group  and  so  on. 

A  few  examples  will  suffice  to  show  the  use  made  of  the 
holding  corporation  and  the  nature  of  the  control  by  means 
of  which  these  systems  are  held  together.    For  this  purpose 


328  COMBINATION    ORGANIZATIONS 

the  organization  of  the  Harriman  System  and  of  the 
Queen  &  Crescent  Route  will  be  briefly  described. 

The  Harriman  System  was  built  up  primarily  by  utiliz- 
ing the  Oregon  Short  Line  Railroad  Company,  a  subsidiary 
of  the  Union  Pacific  Railroad  Company,  to  acquire  stock 
control  over  the  Southern  Pacific  Company,  thus  binding 
together  the  great  Union  Pacific  and  Southern  Pacific 
railway  systems.  Somewhat  later,  through  the  Railroad 
Securities  Company,  also  a  subsidiary  of  the  Union  Pacific 
Railroad  Company,  the  Illinois  Central  Railroad  Company 
was  added  to  the  group. 

In  1901,  the  Harriman  interests  made  their  famous 
"  raid "  on  the  stock  of  the  Northern  Pacific  Railway 
Company  which  resulted  in  a  struggle  with  the  J.  J.  Hill 
and  J.  P.  Morgan  interests  that  was  finally  brought  to  an 
end  by  the  formation  of  the  Northern  Securities  Company 
and  its  subsequent  dissolution  by  order  of  the  United  States 
Supreme  Court.  The  events  leading  up  to  the  formation 
of  the  latter  company  illustrate  clearly  how  competition 
tends  to  bring  such  combinations  into  being. 

In  1901,  the  Northern  Pacific  Railway  Company  and 
the  Great  Northern  Railway  Company  began  to  buy  con- 
trol over  the  Chicago,  Burlington  and  Quincy  Railroad 
Company.  They  purchased  the  stock  of  this  company 
by  exchanging  20-year  4  per  cent  bonds  to  the  value  of 
$200  for  each  $100  share  of  stock.  Within  a  short  time 
they  had  acquired  98  per  cent  or  $108,000,000  of  the  out- 
standing stock  for  which  they  paid  $216,000,000.  The 
Burlington  road,  however,  was  one  of  the  chief  feeders  of 
the  Union  Pacific  for  its  west  bound  traffic,  and  Harriman, 
fearing  that  this  traffic  would  be  diverted  to  the  northern 
roads,  proposed  to  the  Hill-Morgan  interests  that  he  be 
permitted  to  secure  a  substantial  interest  in  the  Burlington. 
This  proposal  was  rejected.  He  then  turned  his  attention 
to   securing   control   over  the   Northern   Pacific   Railway 


CONTROL    COMPANIES  329 

Company  which  at  that  time  held  49  per  cent  of  the  Bur- 
lington stock.  Through  the  Oregon  Short  Line  Railroad 
Company  he  soon  succeeded  in  acquiring  $37,000,000  of 
the  common  stock  and  $41,000,000  of  the  preferred  stock 
of  the  Northern  Pacific.  This  company  had  outstanding, 
at  that  time,  some  $75,000,000  preferred  and  $80,000,000 
common,  all  of  which  was  voting  stock.  Hill  and  Morgan 
became  apprehensive  of  the  large  purchases  of  Northern 
Pacific  stock  and  bought  up  the  majority  of  the  common 
stock.  Although  Harriman  owned  over  51  per  cent  of  the 
total  voting  stock,  he  failed  in  his  attempt  to  secure  control 
of  the  road  because  its  charter  provided  that  the  board  of 
directors  might  redeem  and  retire  the  preferred  class. 
This  the  opposing  group  now  decided  to  do.  But  Harriman 
had  won  a  point  and  it  was  agreed  upon  to  organize  the 
Northern  Securities  Company  to  consolidate  all  interests. 
This  company  was  thereupon  organized  on  November  13, 
1901,  with  an  authorized  capital  stock  of  $400,000,000,  all 
of  one  class.*  This  stock  was  now  exchanged  for  the  stocks 
of  the  Northern  Pacific  at  the  rate  of  $115  of  Securities 
stock  for  each  $100  share  of  the  Northern  Pacific,  and  $180 
in  the  former  for  each  $100  share  of  the  Great  Northern. 
Harriman  received  over  $82,000,000  of  the  new  company's 
stock  for  his  holdings.  In  all,  the  Northern  Securities 
Company  thus  acquired  96  per  cent  of  the  outstanding 
stock  of  the  Northern  Pacific  and  76  per  cent  of  that  of  the 
Great  Northern. 

The  Northern  Securities  Company  was  at  once  attacked 
by  the  state  of  Minnesota  and  by  the  United  States  Gov- 
ernment as  a  combination  in  restraint  of  trade  because  it 
consolidated   competing   lines. '^     In    1904,   the    case    came 

*  A  reprint  of  the  charter  of  this  company  is  given  in  Part  VI. 
It  is  interesting  because  of  its  description  of  the  purpose  of  the 
company. 

5  United  States  v.  Northern  Securities  Co.,  120  Fed.,  721 ;  Minne- 
sota V.  Northern  Securities  Co.,  123  Fed.,  692. 


330  COMBINATION    ORGANIZATIONS 

before  the  United  States  Supreme  Court  which  fiffirmed  the 
decision  of  the  lower  court.  This  judgment  was  that  the 
Northern  Securities  Company  was  an  illegal  combination 
in  restraint  of  trade,  and  enjoined  it  from  voting  the  stock 
of  the  two  railroad  companies  that  was  in  its  possession, 
and  the  two  companies  from  paying  any  dividends  on  their 
stock  to  the  Securities  Company.*^  As  a  result  of  this 
decision  the  stockholders  decided  to  dissolve  the  company 
and  to  distribute  the  stock  that  it  held  to  its  stockholders 
on  a  pro  rata  basis.  The  Harriman  interests  objected  to 
this  and  brought  suit  to  recover  the  Northern  Pacific  shares 
which  they  had  sold  to  the  Securities  Company,  but  the 
Supreme  Court  sustained  the  pro  rata  plan  of  distribution, 
which  was  thereupon  carried  out.'^ 

In  1912,  the  Union  Pacific-Southern  Pacific  System  was 
constituted  essentially  as  shown  in  the  chart  in  so  far  as 
railroad  properties  are  concerned.  It  is  to  be  noted  that 
the  Union  Pacific  Railroad  Company  is  not  only  an  operat- 
ing but  also  a  holding  company.  It  not  only  owned  and 
operated  nearly  3,000  miles  of  railways,  but  it  also  con- 
trolled through  stock  ownership  the  Oregon  Short  Line 
Railroad  Company  and  the  fourteen  small  companies 
shown  on  the  left,  and  in  addition  it  controlled  the  Illinois 
Central  Railroad  Company  and  held  a  27  per  cent  interest 
in  the  Chicago  and  Alton  Railroad  Company.  Its  direct 
holdings,  however,  are  few  and  for  the  most  part  the  system 
is  held  together  by  the  Oregon  Short  Line  Railroad  Com- 
pany. This  company,  with  a  capitalization  of  $100,000,000 
in  stock  and  $135,000,000  in  bonds,  besides  owning  and 
operating  over  1,000  miles  of  railways,  held  $126,000,000 
of  the  stock  of  the  Southern  Pacific  Company,  $50,000,000 
of  the  stock  of  the  Oregon-Washington  Railroad  &  Navi- 
gation Company,  $12,500,000  of  the  stock  of  the  San  Pedro, 

fl  Northern  Securities  Co.  v.  United  States,  '93  U.  S.  197. 
^  Harriman  v.  Northern  Securities  Co.,  197  U.  S.  244. 


CONTROL    COMPANIES 


331 


Los  Angeles  &  Salt  Lake  Railroad  Company  and  a  con- 
trolling interest  in  seven  smaller  companies  and  had  stock 
investments  in  the  New  York  Central,  Sante  Fe,  Chicago, 

RAILROAD  COMPANIES  OF  THE  HARRIMAN  SYSTEM  IN  1911 


Southern  Pacific 
RR  Co  of  Calif. 
IB^On  SlfeOHilL 


Salueiton,  Harniburg 
45  Antonio  Ry.Co- 
OIOM         $?7nill 


El  Paso  Union  Pas- 
senger Oepct-  Co. 
.t5rl.       SgeTti 


Chicago*  Northern 

RR.Co. 
30M        $32  Th 


:zi 


Morgan's  Louisiana 
JTexasRR»SS.Oa 
3i5n.    $I5M|IL 


Central  Pacific  Ry 

Co  {Leased) 
MVM,    480  Mill. 


/ 


Southern  Pacific 

RR-Co  N.Me«iCft 

17  Mill. 


Houston  t  Shrrv* 
port  RR.  Co. 
40H.     t400Th. 


I^ 


Oregon*  California 

RR.Ca 
SS^n     $19  Hill. 


IberiaS  Vermillion 

RR-Co. 
ISM         $30OTh 


South  Pacific 
Coas+  Ry.Ca 

sen,     is  Mill. 


San  Bernadino  S 

RedlandsRRCa 
lOM.        IgpOTh. 


_^ 


Sjranclbco!  North 
ern  F^ific  R>.Ca 
I6SM.    $6  Mill. 


Z^ 


Houston*  Tex  as 

Central  RR  Co. 

695t^.     tiOMiii. 


Fort  Worth  Union 

Passenger  StatiOr 

Co      tlOOlh. 


CarsontrC:ilorado 
Ry.Ca 
S6.38i1iU. 


ttevadaS  California 

RviCo. 
3I6M     16.637  rra. 


Texas&N.Orleans 

RRCo. 
44iri.     SSM.II. 


Houston,  East » 
West  Texas  RR.Ca 
I9IM.      $2  Mill 


San  Francisco 

Terminal  Ca 

$2  Mill. 


Milwaukee  &  St.  Paul,  Chicago  &  Northwestern,  Northern 
Pacific  and  Great  Northern  aggregating  $39,200,000. 
Thus,  this  company,  with  its  $100,000,000  capital  stock. 


332  COMBINATION    ORGANIZATIONS 

held  nearly  $250,000,000  in  the  stocks  of  other  railway 
companies  besides  its  thousand  miles  of  railways. 

The  Southern  Pacific  System  also  presents  a  peculiarity 
of  organization  that  deserves  a  few  words  of  explanation. 
At  the  time  of  the  construction  of  the  Southern  Pacific 
Railway  under  C.  P.  Huntington,  in  the  latter  half  of  the 
decade,  1880-1890,  it  was  found  advisable  to  incorporate 
three  companies  under  which  to  operate  the  railway  mile- 
age constructed  in  California,  New  Mexico  and  Arizona. 
These  were  the  Southern  Pacific  Railroad  Company  of 
California,  of  New  Mexico  and  of  Arizona,  respectively. 
Then  in  order  to  centralize  control  the  Security-Holding 
Company  was  organized  and  acquired  a  majority  of  the 
stock  of  these  three  companies.  Later  on,  the  Southern 
Pacific  Company,  a  pure  holding  corporation,  was  or- 
ganized to  supplant  this  company.  The  control  of  the 
Southern  Pacific  Company  over  the  Central  Pacific  Rail- 
road Company  is  through  leasehold  on  the  entire  equip- 
ment of  the  latter.  The  Southern  Pacific  Company  today 
owns  practically  the  entire  outstanding  stock  of  20  railroad 
companies  and  leases  several  others,  all  of  which  it  oper- 
ates under  the  name  of  the  Southern  Pacific  System.  In 
addition  to  this,  it  owns  practically  all  of  the  stocks  of 
29  other  companies,  among  which  are  a  lumber  company, 
several  land  development  and  irrigation  companies,  several 
oil  exploration  and  pipeline  companies,  several  city  rail- 
way and  power  companies,  several  interurban  electric 
companies  and  a  steamship  company.  It  also  holds  a 
stock  interest  in  12  other  concerns  including  several  water 
and  land  companies,  the  Louisiana  Sugar  Exchange,  the 
Beach  Hotel  Company  and  the  New  Orleans  Board  of 
Trade,  Limited. 

In  1912,  the  Supreme  Court  of  the  United  States  ordered 
the  Union  Pacific^  Railroad  Company  to  give  up  its  control 
over  the  Southern  Pacific  Company  as  it  held  this  relation 


CONTROL    COMPANIES  333 

to  be  in  contravention  to  the  Sherman  Anti-Trust  Act. 
The  decree  of  dissolution  ordered  the  Union  Pacific  Com- 
pany to  divest  itself  of  the  ownership  of  $126,650,000  of 
the  Southern  Pacific  Company's  stock  and  to  prevent  this 
stock  from  falling  into  the  hands  of  the  stockholders  of 
the  Union  Pacific.  Of  this  stock  $38,292,000  was  given 
to  the  Pennsylvania  Company  in  exchange  for  $42,647,200 
of  the  stock  of  the  Baltimore  and  Ohio  Railroad  Company, 
consisting  of  equal  amounts  of  common  and  preferred 
stock.  The  other  $88,357,600  of  Southern  Pacific  stock 
was  turned  over  to  the  Central  Trust  Company  of  New 
York  which  issued  trust  certificates  for  that  amount  to 
the  Union  Pacific  Company.  It  was  also  ordered  that 
these  trust  certificates  should  be  sold  to  persons  other  than 
Union  Pacific  stockholders  by  September  2,  1913.  These 
transactions  were  not  finally  completed  until  December  31, 
1915,  when  the  Union  Pacific  directors  reported  a  net  profit 
of  $16,099,190  from  the  sale  and  disposal  of  the  company's 
Southern  Pacific  holdings.  In  1914,  all  but  $3,594,035 
common  and  $1,805,992  preferred  stock  of  the  Baltimore 
and  Ohio  Railroad  Company  was  distributed  as  a  property 
dividend  to  the  Union  Pacific  stockholders-  In  this  way 
was  the  centralized  control  binding  these  two  great  systems 
together  broken,  and  today  they  operate  as  competing  lines. 
Although  most  of  our  larger  railway  systems  have  been 
formed  by  means  of  the  simple  control  relations  that  exist 
in  the  Union  Pacific  and  Southern  Pacific  Systems,  this  by 
no  means  is  without  exceptions.  For  example  in  the  Queen 
and  Crescent  Route  this  high  degree  of  centralization  of 
control  is  conspicuously  absent.  That  system,  as  will  be 
seen  from  the  accompanying  chart  illustrating  its  organi- 
zation as  it  was  in  1905,  was  held  together  not  through  a 
single  control  corporation,  but  through  the  interrelation 
by  majority  and  minority  holdings  of  voting  stock  by 
three  more  or  less  independent,  or  at  least  uncontrolled 


334 


COMBINATION    ORGANIZATIONS 


companies.  The  system  made  liberal  use  of  pure  holding 
corporations.  Of  these  the  most  prominent  was  the  Michi- 
gan Securities  Company,  a  corporation  that  had  but  $20,- 
000  of  capital  stock  but  that  held  a  controlling  interest  in 
the  Pere  Marquette  Railroad  Company  with  its  $72,500,000 
of  voting  stock,  a  48  per  cent  interest  in  the  Cincinnati, 
Indianapolis  and  Western  Railway  Company  with  its 
$7,000,000  of  voting  stock,  a  large  share  of  the  $12,000,000 


INTERCORPORATE  RELATIONS  OF  THE  QUEEN  AND  CRESCENT  ROUTE 
ABOUT   1906 


EneRailrodd 
Gompani^ 

$l7Et[87nill 


Southern 
Aalluiau  Companu 
^Bnilt-457l)niles 


Senile-  TEOHles 


JAIabama.Neu.Orleans.] 
iTexasSfecif.cJnRijiCol 
]  ltd  iolEnflani/)  ] 
$l9.5Mill.      _    J 


Ooffrd frames  indicafe  pure  confro/com- 

paniffs 
Com/yBnigs  u/ifh  heai/y  frartfs  corrt/brisa 

the  f2ufie/j  i  Crescffrf  f^ufc. 
On/if  f^eucf'fjg  s 

7  a  r/jarf  ant/  dafa  /rvn 
'  fieporf  A/o-  /  of  tfte 
'infirsra^  Commene  Commit 
1909. 


voting  stock  of  the  Cincinnati,  Findlay  and  Fort  Wayne 
Railroad  Company  and  in  addition  a  three-eighths  interest 
in  the  Southwestern  Construction  Company  with  $2,051,300 
voting  stock,  and  that  in  turn  controlled  the  Cincinnati, 
New  Orleans  and  Texas  Pacific  Railway  Company.  Thus 
this  holding  company  partakes  of  the  character  of  a  pure 
"  dummy  "  organization  and  may  be  likened  to  the  dummy 
stockholders  previously  described. 
The  system  has  since  undergone  numerous  changes.    The 


CONTROL    COMPANIES  335 

Pere  Marquette  has  been  lopped  off,  and  the  Cincinnati 
Hamilton  and  Dayton  at  one  time  came  under  the  con- 
trol of  the  Harriman  interests. 

Control  Corporations  among  Public  Utilities.  —  In  the 
field  of  public  utilities,  which  includes  water,  gas  and  elec- 
tric works,  street  railways  and  telephone  and  telegraph 
enterprises,  the  holding  control  corporation  is  but  little 
less  important  than  among  our  railroads. 

In  this  field  we  find  the  splendid  example  of  the  Inter- 
borough-Metropolitan  Company  that  at  one  time  con- 
trolled through  direct  ownership  of  stock  the  New  York 
Railways  Company,  the  Metropolitan  Securities  Company 
and  the  Interborough  Rapid  Transit  Company,  and  in- 
directly through  these  three  some  seventeen  other  com- 
panies, all  operating  street  railways  in  and  about  New 
York  City. 

The  American  Telephone  and  Telegraph  Company,  also 
operating  a  public  utility,  is  even  more  widely  known  than 
the  New  York  Street  Railways  combination.  This  com- 
pany was  incorporated  under  laws  of  the  state  of  New 
York,  in  1885,  primarily  to  construct  and  operate  long 
distance  telephone  lines  for  the  American  Bell  Telephone 
Company  which  owned  all  of  its  capital  stock.  In  1900, 
the  charter  was  amended  so  as  to  increase  its  capitaliza- 
tion and  it  thereupon  acquired  by  substitution  of  securities 
all  of  the  capital  stock  of  the  American  Bell  Company  by 
giving  the  stockholders  of  the  latter  two  of  its  shares  for 
every  one  of  the  Bell  Company  shares  surrendered  to  it. 
The  American  Bell  Telephone  Company  was  subsequently 
dissolved  and  the  American  Telephone  &  Telegraph  Com- 
pany assumed  its  place  as  head  of  the  great  telephone 
system  which  today  owns  and  controls  about  70  per  cent 
of  the  telephone  stations  and  equipment  of  the  country. 

Through  a  monopoly  of  the  famous  Bell  patents  it  is  in 
full  control  of  the  so-called  Bell  System.     In  this  system 


336  COMBINATION    ORGANIZATIONS 

are  the  companies  directly  controlled  by  the  American 
Telephone  &  Telegraph  Company  through  stock  ownership 
and  the  Associated  Bell  Companies.  The  latter  operate 
under  an  arrangement  whereby  the  American  Company 
furnishes  all  needed  telephones,  replaces  them  with  others 
when  necessary,  grants  the  right  to  use  all  patents  owned 
and  controlled  by  it  and  administers  a  centralized  control 
over  the  entire  system.  In  return  for  these  services,  the 
associated  companies  pay  to  the  American  Company  4^ 
per  cent  of  their  annual  gross  telephone  receipts- 

In  1911,  the  American  Telephone  &  Telegraph  Company 
acquired  the  entire  capital  stock  of  the  Western  Telephone 
&  Telegraph  Company  which  was  dissolved.  At  about 
the  same  time  it  gained  control  over  the  Western  Union 
Telegraph  Company  but  was  forced  soon  after  to  relinquish 
its  holdings  in  this  concern  as  the  relation  was  held  to  be 
in  violation  of  the  Sherman  Act. 

Beside  operating  its  own  lines,  this  company,  in  1919, 
controlled  through  direct  and  indirect  stock  ownership 
some  35  telephone  and  telegraph  companies.  It  owned 
also  97  per  cent  of  the  entire  capital  stock  of  the  Western 
Electric  Company,  Inc.,  whose  chief  business  it  is  to  manu- 
facture the  apparatus  used  in  the  Bell  System,  the  en- 
tire capital  stock  of  the  195  Broadway  Corporation  which 
owns  the  great  building  housing  the  main  offices  of  the 
company  in  New  York  City,  and  the  entire  stock  of  the 
Electrical  Securities  &  Construction  Company  that  installs 
and  operates  electrical  protective  devices  and  of  the  Empire 
City  Subway  Company,  Limited,  that  constructs  under- 
ground telephone  conduits.  The  capitalization  of  the  parent 
company  consisted  of  $441,981,200  in  stock,  $229,403,600  in 
bonds  and  $90,000,000  in  coupon  notes.  Thus,  the  whole 
organization  had  issued  altogether  well  over  one  billion 
dollars  in  securities. 

The  cliart,  based  on  available  public  information,  illus- 
trates merely  the  essential  features  of  the  organization.    It 


CONTROL    COMPANIES 


337 


omits  a  number  of  subsidiaries,  such  as  the  Southern  New 
England  Telephone  Company,  the  Bell  Telephone  Company 


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of  Canada  and  the  Cincinnati  &  Suburban  Bell  Telephone 
Company. 

Control  Corporations  among  Industrials.  —  Our  in- 
dustrial control  corporations  exhibit  comparatively  simple 
lines  of  control  through  stock  ownership.  In  this  respect 
they  resemble  quite  generally  the  type  exemplified  by  the 


338  COMBINATION    ORGANIZATIONS 

American  Telephone  and  Telegraph  organization.  As  a 
rule  they  acquire  the  ownership  of  all  of  the  outstanding 
stock  of  their  subsidiaries  with  the  exception  of  such  shares 
as  are  necessary  to  qualify  the  directors  of  these  corpora- 
tions under  their  respective  corporation  laws.  They  thus 
partake  of  the  character  of  incomplete  mergers  and  amal- 
gamations. They  retain  the  corporate  entity  of  the  sub- 
sidiary chiefly  because  it  serves  to  set  aside  definite  pieces 
of  property  that  can  be  more  easily  used  to  support  bond 
issues.  If  the  subsidiaries  were  dissolved  it  would  most 
likely  place  the  head  corporation  under  the  necessity  of  suc- 
cessively hypothecating  its  collective  property  when  ex- 
pansions were  to  be  undertaken. 

For  the  same  reason  industrial  as  well  as  other  control 
companies  usually  cause  subsidiaries,  all  of  whose  stock 
the  parent  retains,  to  be  incorporated  for  the  purpose  of 
constructing  and  operating  new  plants.  Then,  as  the  work 
progresses,  bonds  are  issued  to  the  public  in  order  to  secure 
the  necessary  capital.  Such  was  the  expedient  adopted 
by  the  United  States  Steel  Corporation  when,  in  1906,  it 
caused  the  Indiana  Steel  Company  to  be  incorporated  to 
undertake  the  construction  and  operation  of  the  great  steel 
plant  at  Gary,  Indiana;  and  likewise  when  some  years  later 
it  formed  the  Federal  Shipbuilding  Company  to  construct 
and  operate  a  shipbuilding  plant  at  Newark,  New  Jersey. 

However,  industrial  holding  corporations  also  frequently 
consolidate  two  or  more  of  their  subsidiaries  through  mer- 
gers and  amalgamations.  Consolidations  of  this  type  are 
usually  undertaken  for  the  purpose  of  centralizing  the  ad- 
ministration of  plants  within  a  given  geographical  area  or 
locality  or  in  order  to  centralize  control  over  a  number  of 
subsidiaries  engaged  in  the  same  kind  of  undertaking. 
Here  again  the  United  States  Steel  Corporation  furnishes 
some  excellent  examples.  Thus,  in  1903,  the  American 
Steel  Hoop  Company,  the  National  Steel  Company  and  the 


CONTROL    COMPANIES  339 

Carnegie  Company  were  amalgamated  into  the  Carnegie 
Steel  Company  placing  under  a  single  management 
most  of  the  United  States  Steel  Company's  plants  in  the 
Pittsburgh  and  adjacent  Ohio  districts.  At  the  same  time 
the  American  Coke  Company,  the  Continental  Coke  Com- 
pany, the  H.  C.  Frick  Coke  Company,  and  McClure  Coke 
Company,  the  Southwest  Connellsville  Coke  Company  and 
the  United  Coal  and  Coke  Company  were  all  merged  into 
the  H.  C.  Frick  Coke  Company. 

A  brief  description  of  the  control  organization  of  the 
Standard  Oil  Company  of  New  Jersey  and  the  United 
States  Steel  Corporation  will  serve  to  show  the  simple  form 
of  stock  ownership  control  used  by  industrials. 

The  Standard  Oil  Company  of  New  Jersey  was  first  in- 
corporated in  1882  in  compliance  with  the  Standard  Oil 
Trust  Agreement  of  that  year.  In  1890,  the  Supreme 
Court  of  the  state  of  Ohio  declared  the  trust  agreement 
to  be  void.  However,  the  dissolution  of  the  trust  was  not 
carried  out  expeditiously  and  it  was  not  until  1899  that 
it  may  be  said  to  have  been  completed.  In  that  year  the 
charter  of  the  Standard  Oil  Company  of  New  Jersey  was 
amended  to  enable  the  company  among  other  things  "  to 
purchase  or  otherwise  acquire,  hold,  sell,  assign,  and  trans- 
fer shares  of  capital  stock  and  bonds  or  other  evidences  of 
indebtedness  of  corporations,  and  to  exercise  all  the  privi- 
leges of  ownership,  including  voting  upon  the  stock  so 
held."  At  the  same  time  the  capital  stock  of  the  company 
—  which  since  March  19.  1892,  had  been  $10,000,000  — was 
increased  to  $110,000,000.  The  purpose  of  this  move  was 
essentially  to  reconstitute  the  lines  of  control  established 
through  the  old  trust  organization  by  substituting  in  its 
place  a  holding  corporation.  Practically  all  of  the  corpora- 
tions and  associations  that  had  been  parties  to  the  trust 
were  thereupon  acquired  through  stock  ownership  con- 
trol within  a  short  period  of  time.    But  the  process  of  ex- 


340 


COMBINATION    ORGANIZATIONS 


Name  of  Company 


1.  Anglo-American  Oil  Co.,  Ltd 

2.  Atlantic  Refining  Company 

3.  Buckeye  Pipe  Line  Company 

4.  Chesebrough  Manufacturing  Co., 

Consol 

5.  Colonial  Oil  Company 

6.  Continental  Oil  Company 

7.  Crescent  Pipe  Line  Company 

8.  Eureka  Pipe  Line  Company 

9.  Galena-Signal  Oil  Co 

10.  Indiana  Pipe  Line  Company 

11.  Lawrence  Natural  Gas  Company .  . 

12.  Mahoning  Gas  Fuel  Company .... 

13.  Mountain  State  Gas  Company.  .  .  . 

14.  National  Transit  Company 

15.  New  York  Transit  Company 

16.  Northern  Pipe  Line  Company 

17.  Northwestern  Ohio  Natural  Gas 

Company 

18.  Ohio  Oil  Company 

19.  People's  Natural  Gas  Company .  .  . 

20.  Pittsburg  Natural  Gas  Company . . 

21.  Solar  Refining  Company 

22.  Southern  Pipe  Line  Company 

23.  South  Penn  Oil  Company 

24.  Southwest  Pennsylvania  Pipe  Lines 

25.  Standard  Oil  Company  (California) 

26.  Standard  Oil  Company  (Indiana)  . 

27.  Standard  Oil  Company  (Iowa) .... 

28.  Standard  Oil  Company  (Kansas) . . 

29.  Standard  Oil  Company  (Kentucky) 

30.  Standard  Oil  Company  (Nebraska) 

31.  Standard  Oil  Company  (New  York) 

32.  Standard  Oil  Company  (Ohio) .... 

33.  Swan  and  P^'inch  Company 

34.  Union  Tank  Line  Company 

35.  Vacuum  Oil  Company 

36.  Washington  Oil  ('ompany 

37.  Waters-Pierce  Oil  Company 


Total  capital 

Owned  by  Stand- 

stock 

ard  Oil  Company 

£1,000,000 

£999,740 

$5,000,000 

$5,000,000 

10,000,000 

9,999,700 

500,000 

277,700 

250,000 

249,300 

300,000 

300,000 

3,000,000 

3,000,000 

5,000,000 

4,999,400 

10,000,000 

7,079,500 

1,000,000 

999,700 

450,000 

450,000 

150,000 

149,900 

500,000 

500,000 

25,455,200 

25,451,650 

5,000,000 

5,000,000 

4,000,000 

4,000,000 

2,775,250 

1,649,450 

10,000,000 

9,999,850 

1,000,000 

1,000,000 

310,000 

310,000 

500,000 

499,400 

10,000,000 

10,000,000 

2,500,000 

2,500,000 

3,500,000 

3,500,000 

17,000,000 

16,999,.500 

1,000,000 

1,000,000 

1,000,000 

1,000,000 

1,000,000 

999,300 

1,000,000 

997,200 

600,000 

599,500 

15,000,000 

15,000,000 

3,500,000 

3,499,400 

100,000 

100,000 

3,500,000 

3,499,400 

2,500,000 

2,500,000 

100,000 

71,480 

400,000 

274,700 

CONTROL    COMPANIES  341 

tension  of  control  was  not  halted  until  the  United  States 
Government,  in  1910,  brought  suit  in  the  Circuit  Court  of 
the  United  States  for  the  Eastern  District  of  Missouri  for 
the  dissolution  of  the  combination.  The  case  was  taken 
on  appeal  by  the  defendants  to  the  United  States  Supreme 
Court,  which,  in  1911,  upheld  the  decision  of  the  lower 
court  and  ordered  the  Standard  Oil  Company  of  New" 
Jersey  to  disposses  itself  of  the  stocks  of  most  of  its  con- 
trolled companies  and  to  refrain  from  again  establishing 
any  form  of  control  over  them  that  might  be  in  restraint 
of  competition. '^ 

At  the  time  of  this  decree  of  dissolution,  the  Standard  Oil 
Company  held  a  stock  control  over  some  forty  corporations 
and  a  minority  interest  in  two  other  corporations.  Of 
these,  thirty-seven  were  controlled  directly  by  the  Standard 
Oil  Company  of  New  Jersey  as  shown  on  the  opposite  page. 

Participation  in  the  other  five  was  instituted  through  the 
medium  of  the  National  Transit  Company  which  held  a 
controlling  interest  in  three  of  them  and  a  minority  in- 
terest in  two- 

The  United  States  Steel  Corporation  is  a  pure  industrial 
control  company  whose  general  features  of  organization  are 
strikingly  similar  to  those  of  the  old  Standard  Oil  Com- 
pany, just  described.  It  was  formed  in  1901,  in  New  Jer- 
sey, with  an  authorized  capital  stock  of  $1,100,000,000 
made  up  of  equal  amounts  of  common  and  preferred  stock. 

8  Standard  Oil  Co.  v.  United  States,  221  U.  S.,  1. 


342 


COMBINATION    ORGANIZATIONS 


Under  the  plan  of  promotion  the  corporation  was  to  ac- 
quire, by  means  of  the  substitution  of  securities,  the  entire 
outstanding  stock  of  the  following  eleven  companies: 


1.  Federal  Steel  Company. .  . 

2.  National  Tube  Company. . 

3.  American    Steel    &    Wire 

Company 

4.  National  Steel  Company . . 

5.  American  Tin  Plate  Com- 

pany  

6.  American       Steel       Hoop 

Company 

7.  American       Sheet       Steel 

Company 

8.  Lake  Superior    Consoli- 

dated Iron  Mines  Com- 
pany  

9.  Shelby   Steel   Tube   Com- 

pany  

10.  American  Bridge  Company 

11.  The  Carnegie  Company.. 


Common 
Stock 


$46,484,300 
40,000,000 

50,000,000 
32,000,000 

28,000,000 

19,000,000 

24,500,000 

29,425,940 

8,151,500 

30,527,800 

160,000,000 


$467,989,540 


Preferred 
Stock 


$53,260,900 
40,000,000 

40,000,000 
27,000,000 

18,350,000 

14,000,000 

24,500,000 


5,000,000 
30,527,800 


$252,638,700 


Total 


$99,745,200 
80,000,000 

90,000,000 
59,000,000 

46,350,000 

33,000,000 

49,000,000 

29,425,940 

13,151,500 

61,055,600 

160,000,000 


$720,628,240 


To  acquire  these  securities  the  United  States  Steel  Cor- 
poration issued  $508,227,394  in  common  stock,  $510,205,743 
in  preferred  stock,  $303,450,000  in  bonds  and  assumed 
$80,963,680  in  the  outstanding  bonds  of  these  companies, 
a  total  of  $1,402,846,817  in  securities. 

With  the  exception  of  the  Shelby  Steel  Tube  Company 
each  of  the  eleven  companies  taken  over  by  the  Steel  Cor- 
poration was  itself  a  holding  company  that  controlled 
numerous  subsidiaries.  In  the  aggregate  these  were  well 
over  one  hundred  in  number.  Tn  1902,  the  corporation 
acquired  the  $20,000,000  of  outstanding  capital  stock  of 
the  Union  Steel  Company ;  in  1903,  the  mergers  and  amal- 
gamations    of     subsidiaries     previously     described     were 


CONTROL    COMPANIES  343 

effected;  in  1904,  the  Clairton  Steel  Company  was  taken 
over  and  in  1907,  the  corporation  bought  nearly  the  entire 
outstanding  capital  stock  of  the  Tennessee  Coal,  Iron  and 
Railroad  Company.  In  addition  to  these  acquisitions  the 
Steel  Corporation  has  caused  several  large  corporations 
to  be  organized  from  time  to  time  to  undertake  the  con- 
struction and  operation  of  new  plants.  Among  these  are 
the  Indiana  Steel  Company  and  the  Universal  Portland 
Cement  Company,  in  1906,  the  Federal  Shipbuilding  Com- 
pany, in  1917,  the  Chickasaw  Shipbuilding  Company,  in 
1918,  and  many  others. 

The  accompanying  chart  shows  the  organization  of  the 
Steel  Corporation  as  of  1919,  as  nearly  as  this  can  be  as- 
certained. In  that  year  it  controlled  through  its  eleven 
primary  subsidiaries  over  160  different  companies.  Among 
the  large  units  only  one,  the  Federal  Steel  Company,  is 
a  pure  holding  company,  while  all  of  the  others  own  in 
fee  and  operate  plants  and  equipment  of  one  type  or 
another.  In  but  very  few  instances  are  subsidiaries  con- 
trolled through  the  ownership  of  less  than  practically  the 
entire  amount  of  outstanding  capital  stock.  Among  the 
exceptions  are  the  Pewabic  Company,  controlled  through 
the  ownership  of  50  per  cent  of  the  capital  stock,  the  Pitts- 
burg, Bessemer  &  Lake  Erie  Railroad  controlled  through 
a  52.2  per  cent  stock  ownership,  the  Pennsylvania  &  Lake 
Erie  Dock  Company  through  78  per  cent  stock  ownership 
and  the  Pittsburg  Limestone  Company. 

While  industrial  control  companies  are  ordinarily  quite 
simple  and  confine  their  holdings  very  largely  to  business 
undertakings  within  a  given  industry,  there  are,  neverthe- 
less, conspicuous  exceptions  to  this  general  rule.  In  this 
class  are  the  five  great  American  Packing  Companies, 
namely,  Swift  &  Company,  Armour  &  Company,  the 
Cudahy  Packing  Company,  Morris  &  Company  and  Wilson 
&  Company,  Inc.     They  are  interested  individually   and 


344* 


COMBINATION    ORGANIZATIONS 


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CONTROL    COMPANIES  345 

jointly  in  banks,  public  utilities,  railroads,  cotton  oil  com- 
panies, publications  and  numerous  other  concerns  whose 
activities  are  technically  not  pertinent  to  the  packing 
industry. 

The  varied  interests  of  E.  I.  du  Pont  de  Nemours  & 
Company  present  a  similar  situation.  This  company  was 
organized  primarily  for  the  purpose  of  manufacturing 
powder,  explosives  and  constituent  and  derivative  chemi- 
cals- In  1920  it  controlled  directly  besides  several  powder 
and  chemical  companies,  a  building  and  construction  com- 
pany, a  moving  picture  theater  company,  a  varnish  works, 
a  hotel  company,  an  engineering  concern  and  an  investment 
company.  Through  the  latter  company,  which  is  the  Du 
Pont  American  Industries,  Inc.,  the  parent  concern  con- 
trols three  other  securities  companies,  one  of  which  owns 
38  per  cent  of  the  outstanding  stock  of  the  General  Motors 
Corporation.  This  company  in  turn  owns  practically  the 
entire  outstanding  capital  stock  of  46  companies  engaged  in 
the  manufacture  of  automobiles,  parts,  accessories,  etc., 
and  has  a  large  interest  in  27  other  companies. 

The  Control  Company  in  Ocean  Transportation.  —  The 
International  Mercantile  Marine  Company  today  occupies 
the  same  position  in  the  field  of  ocean  transportation  of  the 
world  that  the  United  States  Steel  Corporation  occupies 
in  the  iron  and  steel  industry  of  the  United  States.  This 
corporation  is  noteworthy  because  it  controls  companies 
chartered  in  four  different  countries,  namely,  the  United 
States,  Canada,  the  United  Kingdom  and  Belgium.  The 
company  itself  was  incorporated  in  New  Jersey  in  1893  as 
the  International  Navigation  Company.  This  charter 
was  amended  in  1902  and  the  name  changed  to  Inter- 
national Mercantile  Marine  Company.  At  the  same  time, 
the  authorized  capital  stock  was  increased  to  $120,000,000 
made  up  of  equal  parts  of  common  and  6  per  cent  cumu- 
lative  preferred    stock.     The    company    then    acquired    a 


346 


COMBINATION    ORGANIZATIONS 


controlling   interest  in   eight  marine  transportation   com- 
panies and  a  minority  interest  in  several  others.     Its  sub- 


sidiarics  and  major  holdings  in  other  companies,  as  they 
were  reported  to  have  been  in  1919,  are  shown  in  the  ac- 
companying chart. 


CONTROL    COMPANIES  347 

The  majority  of  the  voting  stock  was  originally  held  by 
a  voting  trust.  This,  however,  terminated  in  1915,  when 
the  company  was  forced  into  temporary  receivership  be- 
cause of  default  in  the  interest  of  its  mortgage  and  col- 
lateral trust  bonds.  By  the  middle  of  1916  the  bond- 
holders' claims  had  been  adjusted  and  control  reverted  to 
the  stockholders.  In  the  same  year  the  company  together 
with  the  American  International  Corporation,  W.  R.  Grace 
&  Company  and  the  Pacific  Mail  Steamship  Company 
purchased  the  entire  plant  and  assets  of  the  New  York 
Shipbuilding  Company.  The  several  interested  companies 
then  caused  the  New  York  Shipbuilding  Corporation  to 
be  formed  and  transferred  to  it  the  properties  which  had 
been  acquired-  The  four  companies  work  under  an  agree- 
ment whereby  the  tonnage  constructed  by  their  shipbuild- 
ing corporation  is  apportioned  among  them  and  is  paid  for 
on  a  cost-plus-a-percentage  plan.  The  Mercantile  Marine 
Company  also  owns  the  office  building  at  Number  1  Broad- 
way in  New  York  City,  which  is  managed  through  a  sub- 
sidiary. 

A  similar  organization  —  financially  less  important,  but 
more  extensive  in  the  number  of  companies  controlled  — 
is  the-  Atlantic,  Gulf  and  West  Indies  Steamship  Lines. 
This  company  was  incorporated  in  Maine,  in  1908,  and 
took  over  certain  properties  of  a  defunct  corporation.  Sub- 
sequently it  acquired  practically  the  entire  outstanding 
stock  of  some  nineteen  steamship  and  wharf  companies 
operating  along  the  Atlantic  coast  and  in  the  Gulf  of 
Mexico,  including  several  oil  producing  companies  in 
Mexico.     But  few  of  its  subsidiaries  are  alien  corporations. 

Mercantile  Control  Companies.  —  In  the  mercantile  field 
various  attempts  have  been  made  to  build  up  extensive  re- 
tail stores  organizations  through  the  medium  of  the  con- 
trol company.  The  early  attempts  in  this  direction  were 
failures.     This  was  notably  the  case  with  the  old  H.  B. 


348  COMBINATION    ORGANIZATIONS 

Claflin  &  Company,  a  corporation  which  stood  at  the  head 
of  a  combination  of  department  stores.  However,  there 
are  today  several  control  companies  that  are  operating 
successfully  in  this  general  field.  Most  of  them  are  of 
recent  formation. 

The  American  Druggists'  Syndicate  incorporated  in  1910, 
in  New  York,  now  controls  some  ten  active  and  six  inac- 
tive corporations  through  ownership  of  practically  all  of 
their  outstanding  stock.  The  United  Drug  Company,  or- 
ganized in  Massachusetts,  in  1916,  with  an  authorized 
capital  of  $65,000,000  controlled,  in  1920,  some  fifteen  cor- 
porations with  a  total  authorized  capital  stock  of 
$31,584,000. 

A  somewhat  more  recent  mercantile  control  corporation 
is  the  United  Retail  Stores  Corporation,  formed  in  Dela- 
ware in  1919,  with  an  authorized  capital  consisting  of 
160,000  founders'  shares  of  no  par  value,  1,000,000 
shares  of  class  "  A  "  common  stock  of  no  par  value  and 
$10,000,000  eight  per  cent  accumulative  preferred  stock. 
This  corporation  controls  the  United  Cigar  Stores  Company 
of  America,  the  U.  R.  S.  Candy  Stores,  Inc.,  Fuerst  & 
Kraemer  Company,  Gilmers  Inc.,  and  Montgomery  Ward  & 
Company,  Inc. 

In  the  dry  goods  trades  there  are  also  several  such  or- 
ganizations. Among  these  may  be  mentioned  the  Asso- 
ciated Dry  Goods  Corporation,  incorporated  in  Virginia  in 
1916,  that  controls  some  fourteen  other  companies,  and 
the  Mercantile  Stores  Company,  Inc.,  formed  in  Delaware, 
in  1919,  as  a  reorganization  of  the  Mercantile  Stores  Cor- 
poration whose  properties  consisted  chiefly  of  all,  or  of  the 
major  part,  of  the  outstanding  stocks  of  some  twenty-four 
dry  goods  and  manufacturing  companies. 

The  Control  Company  in  Other  Countries.  —  The  con- 
trol company  is  characteristically  American  and  has  not 
come  into  i^eneral  use  in  Europe.    A  few  are  to  be  found  in 


CONTROL    COMPANIES  349 

England,  France,  Germany,  Holland  and  Switzerland,  but 
even  many  of  these  are  developments  of  American  enter- 
prises. The  reason  for  this  condition  may  very  largely  be 
attributed  to  the  use  of  other  instrumentalities  of  combina- 
tion such  as  trusts  and  kartells  which  are  generally  illegal 
in  the  United  States.  Through  these  a  partial  control  can 
be  exercised.  If  complete  control  is  desired,  this  may  be 
obtained  through  consolidation  or  outright  absorption. 
Among  the  larger  European  concerns  that  may  properly  be 
called  control  companies  are  the  Allegemeine  Electrizi- 
tatsgesellschaft  (General  Electric  Company  of  Germany), 
the  Schaaffhausenscher  Bankverein  (a  German  potash 
combination) ,  the  Swiss  Aktiengesellschaft  fiir  Unternehm- 
ungen  der  Textilindustrie,  the  De  Beers  Consolidated 
Mines,  Limited  and  the  Car  Trust  Realization  Company,^ 
of  England,  the  Compagnie  generale  d'Electricite,  of 
France,  and  the  Compagnie  generale  des  Nitrates,  of 
Belgium. 

As  a  result  of  the  industrial  breakdown  arising  out  of 
the  war,  there  is  now  in  evidence  a  general  movement,  that 
is  especially  strong  in  the  central  European  countries,  to- 
ward a  more  extensive  use  of  this  type  of  ownership  organi- 
zation. Nevertheless,  it  is  doubtful  whether  this  type  of 
company  will  attain  there  the  pre-eminent  position  that 
it  holds  in  tlie  United  States. 

Advantages  and  Weaknesses  of  the  Control  Company.  — 
The  reason  for  the  very  extensive  use  of  the  control  com- 
pany in  the  United  States  for  purposes  of  business  owner- 
ship is  found  to  lie  in  the  inherent  advantages  that  this 
form  of  organization  offers.  These  may  not,  however,  be 
considered  abstractly,  for  they  are  but  the  reflection  of 
the  background  of  the  economic,  political  and  judicial 
structure  of  the  United  States.  To  this  background  do  they 
owe  their  existence.  Were  it  to  be  altered,  it  might  deprive 
^  The  Car  Trust  Realization  Company  is  a  joint  stock  company. 


350  COMBINATION    ORGANIZATIONS 

them  of  certain  advantages  that  they  now  possess,  or  even 
do  away  with  them  entirely.  With  this  point  in  mind,  we 
may  turn  to  a  consideration  of  some  of  the  more  promi- 
nent advantages. 

(1)  The  holding  company  is  admirably  adapted  to  the 
formation  of  horizontal  as  well  as  vertical  combinations. 
In  this  particular  it  differs  materially  from  the  federation 
organizations  such  as  the  pool,  the  kartell  and  the  syndi- 
cate. It  is  hardly  necessary  to  dwell  upon  this  feature. 
We  have  seen  from  the  examples  given  that  most  of  our 
larger  control  companies  link  together  long  chains  of  like 
as  well  as  unlike  companies.  While  the  American  Tele- 
phone and  Telegraph  Company,  the  International  Mer- 
cantile Marine  Company,  the  United  Retail  Stores 
Company  and  others  are  characteristically  horizontal  com- 
binations, they,  nevertheless,  have  also  reached  backward 
or  forward  to  include  in  their  organizations  concerns  oper- 
ating in  preceding  or  succeeding  stages  of  industrial  ac- 
tivity. Thus  we  find  the  Western  Electric  Company,  the 
Empire  City  Subway  Company  and  the  195  Broadway 
Corporation  among  the  controlled  companies  of  the  Ameri- 
can Telephone  and  Telegraph  Company,  and  the  New  York 
Shipbuilding  Company  jointly  controlled  by  the  Interna- 
tional Mercantile  Marine  Company  and  others.  On  the 
other  hand,  it  requires  but  a  cursory  inspection  of  the 
chart  depicting  the  organization  of  the  United  States  Steel 
Corporation  in  order  to  enable  one  to  grasp  the  extent  to 
which  not  only  integration  but  also  horizontal  combination 
has  been  effected  through  the  medium  of  the  control  com- 
pany. Here  we  find  controlled  companies  that  respec- 
tively produce  the  coal,  the  iron  ore,  the  limestone,  that 
operate  blast  furnaces,  steel  converters,  rolling  mills  and 
plants  for  the  manufacture  of  finished  products;  that  oper- 
ate railways,  docks  and  steamers,  and  even  the  United 
States  Steel  Products  Company,  which  handles  the  export 


CONTROL    COMPANIES  351 

trade  of  all  of  that  corporation's  subsidiaries.  Due  to  the 
facility  with  which  combination  in  either  direction  may  be 
carried  out,  the  control  company  has  unlimited  possibilities 
in  the  direction  of  monopoly,  a  fact  that  is  well  attested 
by  the  numerous  cases  that  have  been  brouglit  before  our 
courts  under  the  Sherman  Anti-Trust  Act  seeking  to  force 
a  dissolution  of  these  combinations. 

(2)  It  lends  itself  readily  to  centralization  of  control 
along  functional  or  technological  lines.  We  saw,  for  ex- 
ample, in  the  reorganizations  effected  within  the  United 
States  Steel  Corporation,  how  this  company  used  the  H.  C. 
Frick  Coal  &  Coke  Company  to  centralize  control  over 
its  coal  mining  and  coke  manufacturing  subsidiaries,  how 
most  of  its  iron  mines  are  under  the  control  of  the  Lake 
Superior  Consolidated  Iron  Mines  and  how  its  manufactur- 
ing^ plants,  railroads,  steamship  companies,  etc.,  are  con- 
trolled througli  separate  corporations.  The  organizations 
created  by  the  five  great  packers  also  furnish  us  with  many 
fine  illustrations  of  this  practice.  Its  advantage  lies  in  the 
opportunity  that  it  affords  for  the  development  of  spe- 
cialists in  the  several  functions  and  for  the  advancement  of 
technique  in  production. 

(3)  It  fits  ideally  into  the  scheme  of  multiplicity  of 
legislative  jurisdictions  which  is  such  a  prominent  feature 
of  our  political  organization.  The  direct  ownership  by  a 
single  corporation  of  business  establishments  scattered 
throughout  several  states  is  objectionable.  In  all  but  one 
of  those  states  it  must  needs  be  a  foreign  corporation,  and 
in  each  one,  it  is  subject  to  special  laws  governing  its 
entry  for  business  purposes.  It  is  there  discriminated 
against  in  favor  of  domestic  corporations.  To  avoid  these 
difficulties,  the  control  company  has  been  successfully  em- 
ployed. The  Southern  Pacific  Railroad  System  was  or- 
ganized with  this  point  in  mind,  as  its  California,  Arizona, 
New    Mexico    and    Texas    subsidiaries    will    testify.     The 


352  COMBINATION    ORGANIZATIONS 

American  Telephone  and  Telegraph  Company,  the  Cities 
Service  Company,  the  General  Electric  Company  and  hosts 
of  others  also  take  cognizance  of  this  fact. 

(4)  It  is  usually  in  a  position  to  take  advantage  of  its 
competitors  in  marketing  its  product.  This  advantage 
tends  to  be  greatest  when  the  control  company  has  attained 
a  commanding  position  in  that  field  of  industry  in  which  it 
operates.  It  may  then  organize  "  bogus  independent  con- 
cerns "  like  those  used  by  the  E.  I.  du  Pont  de  Nemours 
Company,  the  American  Tobacco  Company,  the  National 
Cash  Register  Company,  the  International  Harvester  Com- 
pany and  numerous  others.  But  quite  aside  from  this 
feature,  large  scale  production  and  monopolistic  or  semi- 
monopolistic  position  in  the  industry,  so  common  among 
our  larger  holding  companies,  put  them  in  command  of 
many  forms  of  unfair  competition  that  smaller  concerns 
cannot  use  with  a  like  degree  of  success.^"  In  fact,  so  com- 
mon has  the  use  of  unfair  methods  of  competition  by  con- 
trol companies  become  that  certain  sections  of  the  Clayton 
Amendment  to  the  Sherman  Anti-Trust  Act,  passed  in  1914, 
aim  directly  at  their  suppression. 

(5)  Financial  advantages  also  are  outstanding  features 
of  this  form  of  organization.  There  is  inherent  in  the  con- 
trol company  the  device  that  is  known  as  making  the  enter- 
prise pay  its  own  purchase  price.  Thus,  when  in  1913,  the 
United  Drug  Company  decided  to  go  into  the  cigar  busi- 
ness in  competition  against  the  United  Cigar  Stores  Com- 
pany, the  latter  countered  by  going  into  the  drug  business. 
It  purchased  control  of  the  Riker  &  Hegeman  Company 
for  $3,000,000.  Thereupon,  it  organized  a  new  company 
under  the  laws  of  the  state  of  Delaware  to  which  it  turned 
over  the  control  of  the  Riker  &  Hegeman  Company.  It 
retained  52  per  cent  of  the  stock  of  this  new  company  and 
sold  the  rest,  which  netted  it  some  $2,400,000.    In  this  way 

10  See  W.  H.  S.  Stevens,  Unjair  Competition. 


CONTROL    COMPANIES  353 

the  control  that  it  originally  purchased  for  $3,000,000  cost 
it  but  $600,000.  Similar  methods  were  employed  in  or- 
ganizing the  United  States  Shipbuilding  Company  and  the 
Corn  Products  Company."  Another  financial  advantage 
comes  out  of  the  fact  that,  by  proper  selection  of  classes 
of  securities  coupled  with  the  use  of  pyramided  control,  it  is 
possible  for  a  few  financiers  to  command  enormous  amounts 
of  invested  capital.  This  was  well  illustrated  by  such  ex- 
amples as  the  Rock  Island  Company  and  the  Atlantic 
Coast  Line,  discussed  above. 

(6)  The  ease  with  which  combinations  bound  together 
through  a  control  company  may  be  dissolved  may  also, 
under  certain  circumstances,  prove  to  be  an  advantage. 
Many  of  our  larger  combinations  have  been  declared  by  the 
courts  to  be  in  violation  of  anti-trust  statutes  and  have 
been  ordered  to  dissolve.  Had  they  been  organized  on  the 
principle  of  fusion  it  might  have  meant  considerable  loss 
to  them.  However,  under  the  control  form  of  organization 
the  sale  of  part  of  the  securities  held  was  sufficient  to 
comply  with  the  court's  orders.  This  method  of  dissolu- 
tion as  frequently  as  not  proves  to  be  a  profitable  venture 
for  the  stockholders  of  the  dissolved  concern.  At  least  such 
was  the  result  in  the  case  of  the  sale  of  the  Southern  Pacific 
stock  by  the  Union  Pacific  Railroad  Company.  This  form 
of  organization  consequently  injects  a  high  degree  of  vendi- 
bility into  invested  capital  which  under  present  day  indus- 
trial conditions  appears  to  be  one  of  the  fundamental 
requirements  of  a  good  ownership  organization. 

Weaknesses  of  the  Control  Company.  —  The  advan- 
tages of  the  control  company  are  in  part  offset  by  certain 
weaknesses.  In  general,  these  are  of  two  types,  first  those 
that  pertain  directly  to  the  administration  of  the  enterprise 
and  second,  those  that  affect  the  investor  adversely. 

11  For  an  account  of  these  promotions  see  Dewing,  Corporals 
Promotions  and  Reorganizations. 


354  COMBINATION    ORGANIZATIONS 

(1)  The  administrative  weaknesses  arise  out  of  the  prin- 
ciple of  legal  entity  which  applies  to  all  of  the  controlled 
companies.  Each  one  of  these  companies  must  run  its  own 
business;  it  must  elect  its  own  officers  and  directors,  keep 
its  own  accounts,  make  its  own  reports,  pay  its  own  taxes, 
etc.  To  be  sure,  much  of  it  is  ordinarily  reduced  to  a  mini- 
mum and  is  carried  on  perfunctorily  merely  to  meet  the 
requirements  of  the  law.  But  even  so,  in  a  large  control 
company  that  has  many  subsidiaries,  this  duplication  of 
administrative  details  must  necessarily  increase  the  operat- 
ing expenses. 

(2)  From  the  standpoint  of  the  investor,  the  control 
company's  greatest  defect  is  the  difficulty  of  ascertaining 
the  value  supporting  its  securities.  We  have  already  seen 
how  the  practice  of  over-capitalization  has  brought  about 
a  condition  that  has  reduced  the  outstanding  securities,  at 
their  par  value,  to  nothing  more  or  less  than  a  pure  fiction. 
If  the  investor  is  to  formulate  any  judgment  as  to  the 
soundness  of  the  enterprise  he  must  necessarily  investigate 
the  condition  of  each  of  the  controlled  subsidiaries.  This 
of  itself  would  be  an  enormous  task,  even  if  he  could  se- 
cure complete  reports  of  their  financial  standing,  which, 
however,  is  usually  impossible.  Then  too,  the  dispersion 
of  holdings  among  a  vast  multitude  of  stockholders  makes 
it  very  easy  for  a  few  large  stockholders,  or  a  voting  trust, 
to  gain  control  over  the  company  although  they  may  own 
but  a  minority  of  its  stocks.  The  multiplicity  of  securities 
also  tends  to  bring  about  a  lack  of  unity  of  interest  in  the 
body  of  security-holders.  The  interest  of  the  bondholders, 
preferred  stockholders,  and  common  stockholders  are  fre- 
quently diametrically  opposed  on  many  points,  with  the 
result  that  each  group  is  continually  fighting  the  others  to 
better  its  position. 

But  after  all,  it  is  not  so  much  the  structural  weaknesses 
that  have  brought  our  great  control  companies  into  such 


CONTROL    COMPANIES  355 

bad  repute  as  it  is  the  laxness  of  the  laws  under  which  they 
have  been  formed  that  permit  of  financial  manipulation, 
the  tendency  toward  the  establishment  of  a  monopolistic 
position  in  industry,  and  the  use  by  them  of  many  question- 
able and  unfair  practices  through  which  they  seek  to  break 
down  competition. 


CHAPTER   XVIII 

FINANCE    AND    ASSUMPTION    COMPANIES 

The  legal  requirements  governing  the  formation  of 
securities-issuing  companies,  as  well  as  the  peculiar 
economic  conditions  with  respect  to  promoting  and  financ- 
ing that  are  to  be  found  in  certain  industries,  are  very 
largely  responsible  for  the  existence  of  the  so-called  finance 
companies  and  the  closely  related  assumption  companies. 

Promotion.  —  In  the  broadest  sense  of  the  term,  pro- 
motion is  comprised  of  the  following  steps: 

(1)  First,  the  idea  for  the  new  undertaking  must  be  weighed 
in  the  balance  and  its  feasibiUty  investigated  and  de- 
termined. 

(2)  Next  the  enterprise  must  be  assembled;  namely,  options 
must  be  secured  on  such  properties,  patents,  rights,  etc.,  as 
it  is  thought  desirable  to  include  in  the  undertaking. 

(3)  Then  arrangements  must  be  made  whereby  the  securities 
may  be  issued  in  exchange  for  capital  in  the  form  of  cash 
or  credit  wherewith  to  acquire  the  properties  that  are 
to  be  taken  over. 

(4)  And  in  the  meantime,  the  legal  steps  of  obtaining  a  charter 
and  of  providing  an  administrative  organization  for  the 
corporation  must  be  attended  to. 

Of  all  these,  it  is  usually  the  third  step  that  presents  the 
greatest  obstacle  to  the  successful  promotion  of  a  large 
corporate  business  enterprise.  In  a  small  enterprise,  those 
who  undertake  it  usually  subscribe  all  of  the  capital  that 
is  necessary.    However,  in  a  large  enterprise,  whose  capi- 

356 


FINANCE   AND   ASSUMPTION    COMPANIES     357 

tal  requirements  run  into  millions  of  dollars,  special  ar- 
rangements must  be  made  with  persons  or  companies  that 
have  sufficient  ready  cash  available,  or  are  in  a  position  to 
borrow  it,  to  supply  the  corporation's  need  of  funds.  This 
may  be  done  in  two  ways — (1)  the  securities  may  be 
offered  for  subscription  directly  or  through  jobbers  and 
brokers  to  the  public,  or  (2)  they  may  be  turned  over  in 
large  blocks  to  underwriting  syndicates  or  finance  com- 
panies.    In  the  latter  case,  the  company  is  being  financed. 

What  Constitutes  Financing  a  Company.  —  The  work  of 
the  underwriting  syndicate  may  be  divided  into  two  sets 
of  transactions.  In  the  first  place,  it  contracts  with  the 
corporation  or  the  promoters  to  furnish  a  definite  sum  of 
money  within  a  definite  time  limit  in  exchange  for  the 
securities  that  it  underwrites.  It  thus  agrees  to  supply  all, 
or  at  least  a  large  part,  of  the  investment  capital  necessary 
to  establish  the  enterprise.  In  the  second  place,  the  syndi- 
cate seeks  to  sell  the  underwritten  securities  to  the  public 
in  order  to  secure  new  funds  for  further  operations.  In 
this  transaction  it  may  either  make  a  profit  by  selling  at 
a  higher  price  per  share  than  it  gave  for  the  securities,  or 
lose  heavily  if  the  public  does  not  buy.  Ordinarily  the 
syndicate  can  complete  its  work  and  recover  its  funds  from 
the  public  within  a  relatively  short  period  of  time,  but  fre- 
quently the  securities  must  be  held  by  it  for  years  or  until 
the  corporation  shows  some  tangible  prospects  of  success. 

in  practically  all  English-speaking  countries  under- 
writing, to  the  exclusion  of  nearly  all  others,  has  become 
practically  the  only  method  now  generally  employed  in 
promoting  the  larger  enterprises.  For  this  reason,  the 
term  "  financing  the  enterprise  "  has  been  construed  to 
include  both  of  the  transactions  described  above.  However, 
since  modern  organizing  ability  has  succeeded  in  develop- 
ing specialized  companies  that  confine  their  activities 
essentially  to  one  or  the  other  of  them,  it  will  be  necessary 


358  COMBINATION    ORGANIZATIONS 

to  differentiate.  Consequently,  for  the  purpose  of  this 
chapter,  the  term  financing  connotes  the  supplying  of  capi- 
tal in  the  form  of  investable  funds  in  exchange  for  securi- 
ties, while  the  process  of  throwing  off  the  securities 
acquired  through  financing  transactions  will  be  referred  to 
as  emission  of  securities.  And  correspondingly  we  have 
finance  organizations  to  do  the  financing  and  securities- 
assumption  companies  to  assist  them  by  relieving  them  of 
the  securities  acquired  through  finance  operations. 

General  Finance  and  Assumption  Companies.  —  Under 
modern  conditions  financing  is  done  by  four  agencies, 
namely,  (1)  by  banks  and  trust-companies,  (2)  by  in- 
dustrial corporations,  (3)  by  special  finance  companies, 
and  (4)  by  the  state.     The  latter  need  not  be  considered. 

Not  all  banks  participate  in  finance  operations.  It  is  a 
risky  business,  and  in  order  to  protect  depositors  our  fed- 
eral reserve  and  state  banks  are,  for  the  most  part,  pro- 
hibited by  law  from  engaging  in  it.  In  the  United  States, 
therefore,  the  trust  companies  and  the  private  banking 
associations  perform  this  work  by  becoming  members  of 
underwriting  syndicates.  Over-participation  in  such  ven- 
tures has  been  the  direct  cause  of  the  failure  of  several 
large  trust  companies,  notably  of  the  Knickerbocker  Trust 
Company,  the  Trust  Company  of  the  Republic  and  the 
Merchants  Trust  Company  of  New  York.  These  found 
themselves  in  a  position  in  which  their  funds  were  so 
tied  up  in  securities  upon  which  they  could  not  realize  that 
they  were  unable  to  meet  the  withdrawal  demands  of  their 
depositors. 

In  England,  immediately  after  the  passage  of  the  Limited 
Liability  Act  of  1862,  a  great  number  of  the  so-called 
"  financial  companies "  sprang  up.  These  companies 
usually  accepted  deposits  or  loans  and  conducted  their 
finance  operations  with  borrowed  funds.  At  first  they 
assisted  in  the  reorganization   of  joint  stock  companies, 


FINANCE   AND   ASSUMPTION    COMPANIES     359 

partnerships  and  individual  proprietorships  into  corpora- 
tions with  limited  liability  and  at  a  later  period  financed 
many  of  the  trust  companies  and  investment  companies. 
In  France,  the  famous  Credit  Mobilier  seems  to  have  been 
the  forerunner  of  this  type  of  institution  which  is  at  the 
present  time  represented  there  by  the  "  banques  de  credit  " 
and  the  "  banques  d'affaires  "  that  exist  in  considerable 
numbers.  In  Germany,  they  have  their  counterpart  in  the 
"  Effekstenemmissionsbanken,"  also  called  "  Emissions- 
banken." 

These  institutions  differ  from  the  true  finance  company 
in  that  they  work  very  largely  with  the  funds  of  their  de- 
positors and  not,  as  do  the  latter,  with  their  own  funds.  In 
most  cases  they  appear  not  to  have  been  very  successful 
in  their  finance  undertakings.  Many  have  gone  out  of 
business  altogether,  others  have  become  investment  com- 
panies and  still  others  deposit  and  trust  companies. 

Industrial  corporations  frequently  are  strong  enough 
financially  to  finance  their  newly  created  subsidiaries  with- 
out having  to  resort  to  outside  agencies.  Thus,  when  in 
1906,  the  United  States  Steel  Corporation  decided  to  erect 
the  great  steel  plant  at  Gary,  Indiana,  it  organized  the 
Indiana  Steel  Company  with  an  authorized  capital  stock 
of  $50,000,000  and  financed  the  undertaking  to  a  large  ex- 
tent out  of  its  own  earnings,  for  only  about  $20,000,000  of 
outside  capital  was  secured  through  bond  issues.  This 
practice  is  also  extremely  common  among  the  electrical 
equipment  manufacturing  concerns  and  those  that  con- 
struct gas  works,  water  works  and  street  railways,  etc. 
The  same  thing  is  true  of  land  development,  exploration, 
mining  and  tropical  exploitation  companies. 

Special  Finance  and  Assumption  Companies.  —  The 
special  finance  companies  are  those  that  have  been  created 
especially  for  the  purpose  of  financing  other  companies. 
They  are  usually  more  or  less  permanent  and  in  this  respect 


360  COMBINATION    ORGANIZATIONS 

differ  radically  from  the  underwriting  syndicates  which  are 
temporary  and  confine  their  operations  ordinarily  to  a 
single  venture.  They  may  be  classified  in  two  ways,  that 
is  to  say:  fl)  they  may  undertake  general  finance  opera- 
tions without  reference  to  lines  of  industrial  demarkation 
or  they  may  specialize  in  enterprises  of  a  particular  in- 
dustry and  (2)  they  may  themselves  be  independent  com- 
panies or  subsidiaries  of  banks  or  industrials,  formed  to 
finance  other  subsidiaries  founded  by  the  parent  company.^ 
In  order  to  be  successful,  a  finance  company  must  have 
some  means  of  throwing  off  the  securities  that  it  has  ac- 
quired through  its  operations  in  order  to  obtain  new  capital 
to  continue  its  financing;  otherwise  it  will  become  merely 
an  investment  company  after  its  original  capital  is 
exhausted.  The  company  may,  of  course,  attempt  to  sell 
the  securities  it  holds  to  investors.  But  there  is  a  practical 
difficulty  militating  against  this  procedure;  this  is  the 
fact  that  most  of  the  enterprises  that  have  been  financed 
frequently  do  not  begin  to  show  profits  for  some  years 
immediately  following  their  formation.  Hence,  these 
securities,  ordinarily,  must  be  sold,  if  at  all,  at  a  loss.  To 
avoid  this,  the  finance  companies  usually  resort  to  the  prac- 
tice of  substitution  of  securities  which  they  employ  either 
directly  or  indirectly.  In  carrying  out  the  direct  method, 
the  company  selects  the  better  securities  from  among  its 
holdings  and  pledges  these  as  collateral  in  support  of  an 
issue  of  bonds  or  notes  which  are  sold  to  the  public.  The 
money  thus  secured  is  then  used  for  further  finance  opera- 
tions. In  availing  itself  of  the  second  method,  the  company 
causes  a  new  company  to  be  formed,  and  an  agreement  is 
entered  into  with  it,  whereby  the  new  one  is  obliged  to  take 
from  the  finance  company  such  securities  as  the  latter  de- 
sires to  rid  itself  of.     The  new  company  pays  for  the  sccuri- 

1  In  this  connection  see  also  the  chart  on  pap;e  364  which  shows 
the  close  inter-relation  between  the  great  financial  concerns  of  the 
United  States  and  the  railroad  and  equipment  companies. 


FINANCE   AND   ASSUMPTION    COMPANIES     361 

ties  with  original  capital  or  with  money  obtained  from  bond 
or  note  issues  secured  by  a  pledge  of  the  securities  that  it 
assumes.  Companies  of  this  type  are  securities-assumption 
companies.  They  may  be  either  independent  companies, 
or  subsidiaries  of  the  companies  whose  securities  they  agree 
to  assume,  but  the  latter  is  more  frequently  the  case. 

While  finance  and  assumption  companies  are  character- 
istically European  institutions,  occurring  in  very  large 
numbers  particularly  in  Germany,  there  are,  nevertheless, 
many  excellent  examples  in  the  United  States.  A  descrip- 
tion of  some  of  those  found  in  this  country  will  serve  to 
explain  their  uses  and  inter-relations. 

American  Finance  and  Assumption  Companies.  —  The 
contrast  in  methods  of  financing  subsidiaries  that  are 
being  used  by  the  two  largest  electrical  manufacturing  and 
constructing  companies  of  the  United  States  illustrates  in 
an  admirable  way  the  use  that  can  be  made  of  finance  and 
assumption  companies.  The  two  companies  referred  to 
are  the  Westinghouse  Manufacturing  Company  and  the 
General  Electric  Company.  The  former  has  consistently 
followed  the  practice  of  financing  its  subsidiaries  directly 
while  the  latter  has  made  extensive  use  of  finance  and 
assumption  companies. 

The  Westinghouse  Company's  plan,  in  brief,  has  been  to 
take  as  payment  the  notes  and  bonds  of  companies  that  it 
has  fitted  up  with  electrical  equipment.  These  notes  and 
bonds  are  usually  secured  by  the  stocks  and  plants  of  the 
companies.  Thus,  while  these  companies  were  not  organ- 
ized as  subsidiaries  they,  nevertheless,  remained  under  the 
control  of  the  Westinghouse  Company  until  they  had  paid 
off  their  obligations. 

The  effect  on  the  company  of  this  direct  method  of 
financing  is  well  shown  by  the  great  increase  in  the  amount 
of  certain  items  of  its  balance  sheets.  These  items  are 
investments  in  securities  of  other  companies,  fixed  assets. 


362 


COMBINATION    ORGANIZATIONS 


notes  payable,  funded  liabilities  including  bonds  and  notes 
outstanding  and  capital  stock  outstanding. 


Items 

March  31 
1897 

March  31 
1903 

Oct.  31 
1907 

$6,820,952 

14,350,735 

1,606,658 

1,134,560 

12,401,664 

$7,407,716 

20,179,121 

6,524,000 

3,054,000 

18,129,150 

$29,491,736 

Fixed  assets 

49,370,121 

Notes  payable 

9,209,766 

Funded  liabilities 

29,171,702 

Capital  stock 

27,936,815 

The  great  increase  in  the  amount  of  investments  repre- 
sented by  securities  of  financed  companies  indicates  that 
the  company  was  obliged  to  hold  these  securities  for  some 
years  before  it  could  profitably  dispose  of  them.  To  carry 
this  burden  in  addition  to  growing  plant  requirements  the 
company  resorted  to  increasing  steadily  its  capitalization. 
Its  capitalization,  which  includes  funded  liabilities  and 
capital  stock,  rose  from  about  $13,500,000  in  1897  to  over 
$57,000,000  in  1907  while  the  fixed  assets,  plant  and  equip- 
ment, etc.,  increased  from  about  $14,350,000  to  $49,370,000. 
At  the  same  time  the  funded  liabilities  and  notes  payable 
increased  from  $2,740,000  to  $38,380,000,  most  of  which 
was  used  to  secure  new  capital  for  financing  operations. 
During  the  credit  stringency  of  1907  the  company  was 
forced  into  the  hands  of  a  receiver  in  order  to  straighten 
out  its  finances." 

The  General  Electric  Company,  on  the  other  hand,  met 
a  similar  situation  successfully  by  establishing  two  sub- 
sidiaries, namely,  the  Electrical  Securities  Corporation  and 
the  Electric  Bond  and  Share  Company.  The  former  is 
essentially  an  assumption  company  and  the  latter  a  finance 
company. 

The  Electrical  Securities  Corporation  was  formed  in  1904 
by  the  General  Electric  Company  in  the  State  of  New 

2  See  Dewing,  Corporate  Promotions  and  Reorganizations. 


FINANCE   AND   ASSUMPTION   COMPANIES     363 

York.  In  1919,  its  capitalization  consisted  of  $2,500,000 
common  stock,  all  held  by  the  parent  company,  $1,000,000 
in  five  per  cent  cumulative  preferred  stock  and  $4,181,000  in 
five  per  cent  collateral  trust  bonds.  When  the  parent  com- 
pany finances  a  subsidiary  directly  it  receives  the  stocks 
and  bonds  of  the  subsidiary  in  payment  for  the  equipment 
sold  to  it.  These  securities  are  then  turned  over  to  the 
Electrical  Securities  Corporation  which  pays  the  General 
Electric  Company  for  them  out  of  the  proceeds  of  issues 
of  collateral  trust  bonds  that  it  sells  to  the  public.  These 
bonds  are  supported  by  placing  the  securities  received  in 
the  hands  of  a  trustee  as  a  trust  fund.  The  Securities  Cor- 
poration receives  its  income  from  three  sources:  first,  from 
profits  derived  from  the  sale  of  securities,  which,  in  1909, 
reached  nearly  $850,000,  but  varies  greatly  from  year  to 
year;  second,  from  dividends  declared  on  the  stocks  that 
it  holds,  which  show  a  more  or  less  steady  decline  since 
1911;  and  third,  from  interest  on  bonds  held,  which  is  its 
steadiest  and  in  the  aggregate  its  greatest  source  of  revenue. 
It,  thus,  continues  operation  through  the  principle  of  sub- 
stitution of  securities,  absorbing  securities  of  subsidiaries 
of  the  General  Electric  Company  and  issuing  its  own 
securities  in  the  form  of  bonds  to  the  public.  Dating  from 
the  time  of  its  formation  in  1904,  it  had  sold  to  the  public 
fourteen  series  of  collateral  trust  bonds  of  which  $4,181,000 
were  outstanding  at  the  close  of  1919. 

The  Electric  Bond  and  Share  Company  is  a  subsidiary 
finance  company  of  the  General  Electric  Company.  It 
was  organized  by  the  latter,  in  New  York,  in  1905.  In 
1919,  it  had  outstanding  $10,000,000  of  common  stock,  all 
held  by  the  parent  company,  and  $9,700,000  of  preferred 
stock  held  by  the  public.  This  company  carries  on  its  own 
finance  operations  directly,  purchasing  the  bonds  and 
stocks  of  electrical  and  other  undertakings  that  it  has  or- 
ganized to  make  a  market  for  the  products  of  the  General 


364.  COMBINATION    ORGANIZATIONS 

Electric  Company.  From  time  to  time,  it  has  caused  a 
number  of  assumption  and  control  companies  to  be  formed 
in  order  to  relieve  it  of  its  ever-growing  supply  of  invest- 
ment securities.  By  1919,  it  had  seven  such  companies 
under  its  control  and  through  them  controlled  several  score 
of  others.  It  not  only  financed  these  companies,  but  con- 
solidated and  reorganized  them  and  continues  to  act  as 
fiscal  agent  for  them- 

The  character  of  its  subsidiary  assumption  and  control 
companies  may  be  seen  from  a  brief  description  of  the 
American  Power  and  Light  Company.  This  company  was 
formed  in  1909  by  the  Electric  Bond  and  Share  Company 
to  take  over  the  control,  through  stock  ownership,  of  com- 
panies that  the  latter  had  previously  financed,  namely,  the 
Kansas  Gas  and  Electric  Company,  the  Portland  Gas  and 
Coke  Company,  the  Pacific  Power  and  Light  Company, 
the  Nebraska  Power  Company,  and  the  Southwestern 
Power  and  Light  Company.  These  companies  supply  elec- 
tric light  and  power  to  205  communities,  artificial  gas  to 
32  communities,  natural  gas  to  five  communities,  street 
railway  service  to  three  communities,  water  service  to  seven 
communities,  interuban  service  to  five  communities  and  ice 
service  to  two  communities. 

The  accompanying  diagram  shows  the  inter-relations 
existing  between  the  General  Electric  Company  and  the 
finance  and  assumption  companies  here  mentioned. 

The  Cities  Service  Company,  incorporated  in  Delaware 
in  1910,  and  which  now  controls  80  gas,  electric  light,  heat, 
water,  power  and  traction  companies  and  25  oil-producing 
and  refining  companies,  also  uses  finance  companies  in 
building  up  its  subsidiaries.  One  of  these  is  the  Electric 
Bond  Deposit  Company,  formed  in  Delaware  in  1912  Its 
first  financing  venture  consisted  of  assuming  $491,000  first 
mortgage  bonds,  $500,000  preferred  stock,  and  $262,000 
common  stock  of  the  Ozark  Power  and  Water  Company 


FINANCE   AND   ASSUMPTION    COMPANIES     365 

to  enable  the  latter  to  finance  and  develop  a  15,000  horse- 
power hydro-electric  project  near  Forsyth,   Missouri.     It 


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had  outstanding,  in  1919,  $3,000,000  in  stock  made  up  of 
equal  amounts  of  common  and  preferred,  nearly  all  of 
which  is  owned  by  the  Cities  Service  Company. 


366  COMBINATION    ORGANIZATIONS 

Another  interesting  example  of  the  finance  company  in 
the  field  of  public  utilities  is  the  Gas  and  Electric  Securities 
Company,  organized  in  Delaware  in  1910,  by  the  Henry  L. 
Doherty  interests.  It  is  essentially  a  finance  and  not  a 
control  company,  and  was  organized  primarily  to  promote 
and  finance  the  Cities  Service  Company,  mentioned  above, 
but  it  does  not  now  control  this  company.  Its  operations, 
at  the  present  time,  consist  of  financing  the  subsidiaries 
of  the  Cities  Service  Company  and  other  enterprises  pro- 
moted by  the  Doherty  Organization.  In  order  to  secure 
the  close  cooperation  between  these  several  companies  that 
is  necessary  in  successful  finance  undertakings,  a  carefully 
worked  out  plan  of  interlocking  directors  is  employed. 

A  few  finance  companies  are  also  to  be  found  in  the  field 
of  mining,  development  and  exploration.  For  example, 
the  West  India  Sugar  Finance  Corporation,  formed  in 
Connecticut  in  1913,  finances  sugar  companies  in  the  West 
Indies  by  making  advances  to  them  secured  by  mortgages, 
securities,  and  liens  on  growing  crops.  In  1919,  it  held 
$7,000,000  of  gold  bonds  and  $759,165  in  stocks  of  four 
sugar  companies  located  in  Cuba  and  Porto  Rico.  In  order 
to  supervise  somewhat  the  conduct  of  companies  that  it  has 
financed  or  supplied  with  credit,  it  usually  provides  for 
representation  on  the  board  of  directors.  It  is  not  a  pure 
finance  corporation  in  so  far  as  it  also  makes  loans  without 
enlisting  the  principle  of  substitution  of  securities. 

Specialized,  as  well  as  general,  finance  companies  arc 
to  be  found  among  mining,  land  and  development  enter- 
prises. An  example  is  the  Smelters'  Securities  Company, 
a  subsidiary  of  the  American  Smelting  and  Refining  Com- 
pany. But  these  companies  frequently  develop  into  gen- 
eral finance  companies  by  extending  their  operations  to 
include  a  great  variety  of  undertakings.  Such  a  company 
is  the  Exploration  Company,  Limited,  originally  organized 
in  England  with  an  authorized  capital  stock  of  £375,000. 


FINANCE   AND  ASSUMPTION   COMPANIES     367 

By  1919,  it  had  promoted  and  financed  such  diversified 
enterprises  as  the  South  African  Real  Estate  Trust,  Ltd., 
the  Exploration  Company  of  England  and  Mexico,  Ltd., 
the  El  Oro  Mining  and  Railway  Company,  Ltd.,  the  Suchi 
Timber  Company,  Ltd.,  the  Santa  Rosa  Mining  Company, 
Ltd.,  and  the  Tom  Boy  Gold  Mining  Company.  It  serves 
also  as  a  control  company. 

The  American  International  Corporation  was  formed  in 
New  York  in  1915  to  promote  and  develop  the  foreign  trade 
of  the  United  States.  It  carries  on  in  its  own  name  only 
general  supervisory  and  research  activities,  but  it  also  par- 
ticipates in  six  foreign  trade  companies  through  invest- 
ments in  their  securities  and  controls  subsidiary  companies 
to  carry  on  trading  and  finance  activities  and  others  to 
manage  its  affairs  in  foreign  countries.  The  activities  of 
the  finance  companies  are  described  as  "  Development 
undertakings,  governmental  or  private,  at  home  or  abroad, 
which  usually  involve  the  purchase  of  securities  to  provide 
funds  for  carrying  on  the  work  and  also  the  supervision 
of  the  work  during  its  progress."  The  more  important  of 
these  finance  companies  are  the  China  Corporation,  formed 
in  1916,  to  hold,  develop,  sell  or  otherwise  dispose  of  any 
rights,  franchises,  concessions,  etc.,  and  to  enter  into  con- 
tracts of  all  kinds  with  governments,  corporations  and  in- 
dividuals; the  Siems-Carey  Railway  &  Canal  Company, 
to  construct  and  operate  canals,  waterways,  irrigation 
systems,  railroads,  railways,  telephone  and  telegraph  lines, 
etc.,  in  foreign  and  domestic  countries,  and  the  Latin 
American  Corporation,  to  promote  and  finance  under- 
takings and  enterprises  in  South  America  and  to  see  them 
through  the  formative  period.  It  is  quite  obvious  that  the 
American  International  Corporation  is,  thus,  prepared  to 
undertake  through  subsidiaries  general  finance  operations 
covering  a  whole  array  of  industries. 

There  are  also  a  few  other  excellent  examples  of  assump- 


368  COMBINATION    ORGANIZATIONS 

tion  companies  in  the  United  States.  Among  these  may  be 
mentioned  the  St.  Lawrence  Securities  Company  and  the 
American  Pipe  &  Construction  Securities  Company.  The 
former  was  organized  in  1906,  as  a  subsidiary  of  the 
Aluminum  Company  of  America,  to  relieve  the  parent  com- 
pany of  the  securities  of  the  St-  Lawrence  River  Power 
Company  and  three  others.  It,  thus,  combines  the  func- 
tions of  assumption  and  control.  The  other  company  was 
organized  in  1916,  by  the  American  Pipe  &  Construction 
Company  to  relieve  the  latter  of  securities  that  it  had  re- 
ceived in  payment  for  water  works,  gas  plants,  electric 
light  and  power  plants  and  street  railways  constructed  for 
subsidiary  and  other  corporations.  The  Construction 
Company  sold  to  the  Securities  Company  bonds  to  the  face 
value  of  $7,000,000  and  received  in  return  $3,000,000  in 
stock  and  $3,000,000  in  6  per  cent  collateral  trust  bonds  of 
the  Securities  Company.  It  then  sold  the  preferred  stock 
and  the  bonds  to  acquire  new  capital,  but  retained  control 
of  its  new  subsidiary  through  the  common  stock. 

Finance  and  Assumption  Companies  in  Germany.  — 
While  there  are  but  few  finance  and  assumption  companies 
in  the  United  States  and  England,  they  are  as  common  in 
some  of  the  countries  of  Continental  Europe  as  they  are 
rare  with  us.  This  is  particularly  true  of  Germany,  and 
of  such  countries  as  have  adopted  corporation  laws 
patterned  after  those  of  that  country. 

The  German  law  well  illustrates  the  influence  that  legis- 
lation may  exercise  in  molding  the  form  that  advanced 
types  of  ownership  organization  shall  take.  Elaborate 
provisions  have  been  made  to  insure  the  genuine  nature 
of  the  valuation  of  the  original  assets.  The  starting  of  a 
business  corporation  with  an  insufficiently  subscribed  capi- 
tal is  also  prevented  through  a  provision  requiring  that 
the  corporate  existence  of  a  company  can  not  possibly  begin 
before  its  whole  capital  has  been  subscribed,  and  before 


FINANCE   AND   ASSUMPTION    COMPANIES     369 

at  least  25  per  cent  of  the  authorized  capital  stock,  payable 
in  cash,  is  in  the  actual  possession  of  the  managers.  The 
law  provides  for  two  modes  of  forming  a  company: 
(1)  the  simultaneous  method,  whereby  the  promoters  take 
up  the  whole  authorized  capital  stock  and  offer  it  to  the 
public  after  the  formation  of  the  company;  (2)  the  suc- 
cessive method,  whereby  the  promoters  are  permitted  to 
offer  the  shares  to  the  public  for  subscription  before  the 
registration  of  the  company;  but  in  either  case  the  whole 
of  the  authorized  capital  stock  must  be  subscribed  to  before 
the  corporation  can  begin  business.  However,  the  succes- 
sive method  of  promoting  is  very  rarely  employed  because 
of  the  requirements  laid  down  by  the  Stock  Exchange 
Statute  of  1896.  This  law  prescribes:  (1)  The  compul- 
sory issue  of  a  prospectus,  the  authors  of  which  are  under 
an  especially  stringent  liability;  (2)  the  lapse  of  a  space 
of  time  between  the  incorporation  of  the  company  and  the 
public  issue  of  its  securities,  in  so  far  as  the  securities  are 
not  negotiable  on  any  authorized  exchange  unless  at  least 
one  year  has  elapsed  from  the  date  of  registration  of  the 
company  and  unless  the  first  yearly  balance  sheet  of  the 
company  has  been  published  together  with  the  profit  and 
loss  account,  and  (3)  the  fixing  of  a  minimum  authorized 
capital  for  companies  whose  securities  are  to  be  dealt  in 
on  the  exchanges. 

While  the  successive  method  of  formation  has,  under 
English  and  American  law,  become  practically  the  only 
method  of  forming  corporations,  in  Germany  it  is  so 
hemmed  in  by  exacting  statutes  that  it  is  avoided  when- 
ever possible.  The  most  practical  method  of  formation 
in  that  country,  therefore,  is  to  have  all  of  the  capital  stock 
subscribed  to  and  the  full  capital  paid  in  at  once.  This, 
coupled  with  the  waiting  period  required  by  the  Stock 
Exchange  Law,  not  only  makes  it  necessary  to  finance  the 
companies,  but  also  effectively  prevents  a  quick  reconver- 


370  COMBINATION    ORGANIZATIONS 

sion  into  cash  of  the  securities  purchased  in  finance  opera- 
tions. These  difficulties  have  been  satisfactorily  overcome 
through  the  acceptance,  by  the  German  banks,  of  a  large 
portion  of  the  financing  burden  and  by  the  establishment 
of  large  numbers  of  securities  assumption  and  of  finance 
companies.  As  a  result,  these  two  types  of  securities- 
substitution  companies  are  as  characteristic  of  the  indus- 
trial organization  of  Germany  as  is  the  control  company 
of  the  American  system.  These  finance  companies  are 
either  independent  companies  or  subsidiaries  of  one  or  more 
other  concerns;  and  they  may  undertake  to  finance  all 
kinds  of  industrial  enterprises  or  confine  their  operations 
to  given  industries.  The  assumption  companies,  of  course, 
are  ordinarily  closely  connected  with,  and  usually  con- 
trolled by,  the  companies,  or  banks,  that  turn  over  their 
holdings  in  securities  to  them- 

Independent  finance  companies  are  by  no  means  as 
numerous  as  are  those  that  have  been  formed  by  industrial 
concerns  in  conjunction  with  banks  as  subsidiary  com- 
panies. It  is  also  characteristic  of  them  that  they  usually 
confine  their  financing  operations  to  undertakings  within 
a  given  industrial  field,  rather  than  to  broaden  their  scope 
of  activity  to  industry  in  general.  Many  of  them  prefer 
to  call  themselves  banks,  like  the  "  Bank  fiir  Napthain- 
dustrie "  and  the  "  Bank  fiir  Brauindustrie,"  although 
technically  they  possess  none  of  the  characteristics  of  true 
banks  other  than  the  extension  of  loans  on  mortgage  bonds 
and  stocks  as  security.  Of  the  few  general  independent 
finance  companies  whose  history  is  known  to  us,  the 
Aktiengesellschaft  fiir  Rheinisch-Westfiilische  Industrie 
is  perhaps  the  most  prominent.  This  company,  according 
to  Dr.  Liefmann,^  was  organized  in  Germany,  in  1871,  as 
an  investment  company,  but  soon  became  engaged  in 
financing.     It    founded    successively    the    Gelsenkirchen- 

3  Robert  Liefmann,  Beteiligungs-und  Finanzierungsgesellschaften. 


FINANCE   AND   ASSUMPTION   COMPANIES     371 

Schalker  gas  and  water  works,  a  paper  factory,  numerous 
mining  companies,  assisted  in  financing  a  cement  factory, 
an  industrial  chemical  company,  a  wooden-ware  manufac- 
turing company  and  a  mirror  factory,  and  acquired  also 
an  important  investment  interest  in  a  brewery,  a  boiler  fac- 
tory and  development  undertakings.  From  1884  to  1900, 
its  dividends  fluctuated  between  3  and  60  per  cent,  but 
since  that  time  it  has  frequently  failed  to  declare  a  divi- 
dend. This  may  have  been,  in  part,  due  to  the  fact  that 
it  made  no  close  connection  with  assumption  companies  to 
which  it  might  turn  over  its  securities,  but  sold  them 
outright. 

The  non-independent,  or  affiliated,  finance  companies  are 
ordinarily  organized  by  the  larger  industrial  concerns  in 
conjunction  with  banks.  Thus,  in  1894,  Ludwig  Lowe 
&  Company  and  Bleichroder,  Born  &  Busse,  being  in  need 
of  funds  to  finance  certain  electrical  undertakings,  that 
they  were  equipping  with  machinery,  etc.,  enlisted  the  aid 
of  three  banks,  the  Diskontogesellschaft,  the  Dresdener 
Bank  and  the  Darmstadter  Bank.  These  five  concerns, 
together,  formed  the  Gesellschaft  fiir  Elektrische  Unter- 
nehmungen  and  supplied  it  with  capital  to  finance  the  new 
enterprises. 

Frequently,  the  industrial  concern  is  itself  financially 
strong  enough  to  build  up  its  own  finance  companies.  In 
1897,  the  Allgemeine  Elektrizitiits  Gesellschaft  (General 
Electric  of  Germany)  acquired  a  Swiss  company,  the  Bank 
fiir  Elektrische  Unternehmungen,  which  it  has  since  used 
very  effectively  to  finance  several  score  of  companies. 

The  more  important  holdings  of  the  Bank  fiir  Elektrische 
Unternehmungen  according  to  its  report  for  1911-1912 
were  as  follows:  "* 

*  The  table  is  an  adaptation  from  R.  Liefmann's  Bctciligungs-  und 
Finanzierungsgesellschaften,  pp.  466-467. 


372  COMBINATION    ORGANIZATIONS 

Group  I  —  Electric  Light  &  Power  Companies 


1.  Officine  Elettriche  Genovesi,  Genoa, 

Italy 

2.  Compania  Sevillana  de  Electricidad, 

Seville,  Spain 

3.  Compaiiia    Barcelonesa    de    Elec- 

tricidad, Barcelona,  Spain 

4.  A.-Ges.    Elektrizitatswerk     Strass- 

burg,  Strasbourg,  France 

5.  Kraf tuber tragungswerke     Rheinfel- 

den  A.-Ges.,  Germany 

6.  Deutsch-tJberseeische    Elektrizitats 

Ges.,  Berlin,  Germany 

7.  Schlesische     Elektrizitats     u.     Gas 

A.-Ges.  SUesia,  Germany 

8.  Markisches    Elektrizitatswerk    A.- 

Ges.  Berlin,  Germany 

9.  Ges.   fur  Elektrische   Beleuchtung, 

St.  Petersburg,  Russia 

10.  Elektrizitatswerk     Abo     (Finland) 

A.-Ges.,  Berlin,  Germany 

11.  Elektrizitatswerk     Rathausen     A.- 

Ges.,  Lucerne,  Switzerland 

12.  Kraftwerke     Laufenberg     A.-Ges., 

Switzerland 

13.  Societa  Meridionale  di  Electtricita, 

Naples,  Italy 

14.  Societa  Idroelettricia  Ligure,  Milan, 

Italy .^ 

15.  Compagnie  Centrale  d'Energie  61ec- 

trique,  Paris,  France 

16.  Obcrrheinische  Kraftwerke  A.-Ges., 
Mulhausen,  France 

17.  Elektrizitatswerk  u.  Strassenbahn, 

Konigsberg,  Germany 


Stock 
outstanding 

Amount  held 
by  the  bank 

17,000,000  Lire 

4,000,000 

10,000,000  Pesetas 

4,698,000 

18,000,000     " 

4,440,000 

11,750,000  Marks 

2,190,000 

12,000,000       " 

3,300,000 

120,000,000       " 

5,000,000 

11,000,000       " 

629,000 

8,000,000       " 

4,000,900 

40,000,000  Rubles 

3,000,000 

2,000,000  Marks 

1,000,000 

4,100,000  Francs 

490,000 

15,500,000       " 

810,000 

10,000,000  Lire 

2,000,000 

6,000,000       " 

2,000,000 

15,000,000  Francs 

812,500 

20,000,000  Marks 

4,400,000 

2,000,000       " 

667,000 

FINANCE   AND   ASSUMPTION   COMPANIES     373 


Group  II  —  Transportation  Companies 

18.  Unione  Italiana  Tramways   Elet-I 

trici,  Genoa,  Italy \     18,000,000  Lire 

19.  Solinger   Kleinbahn   A.-Ges.,   Sol- 

ingen,  Germany 2,500,000  Marks 

20.  Ges.  fiir  elektrische  Hoch  u.  Unter- 

grundabhnen,  Berlin 

21.  Schlesische     Kleinbahn     A.-Ges., 

Kattowitz,   Germany 


50,000,000 
10,000,000 


Group  III  —  Electro-Chemical  Companies 


22.  Elektrochemische  Werke  G.m.b.  H., 

Bitterfeld,  Germany 

23.  Brandenburgische   Carbid-u.   Elek- 

trizitats  Werke,  Germany 

24.  "Nitrum"  A.-Ges.,  Bodio,  Switzer- 

land   


5,500,000  Marks 
3,500,000       " 
1,000,000  Francs 


Group  IV  —  Manufacturing  Companies 


25.  A.-Ges.  Brown  Boveri  &  Company, 

Baden,  Germany 

26.  Felton    u.    Guilleaume     Karlswerk 

A.-Ges.,  Alsace,  France 


28,000,000  Francs 
55,000,000  Marks 


Group  V  —  Finance  Companies 

30,000,000  Francs 


27.  A.-Ges.  "Motor,"  Baden,  Germany 

28.  Watt  A.-Ges.  fiir  elektrische  Unter- 

nehmungen,  Switzerland 

29.  Dinamo,  Societa  Italiana  per   Im- 

prese  Elettriche,  Milan,  Italy 

30.  Societe    Centrale    pour    1' Industrie 

electrique,  Paris,  France 

31.  Societa  per  lo  Sviluppo  delle  Imprese 

Elettriche  in  Italia 

32.  Elektrizitats-A.-Ges.  vorm.  W.  Lah- 

meyer  &  Company,  Germany.  . 


10,000,000       " 
5,000,000  Lire 
20,000,000  Francs 
10,000,000  Lire 
25,000,000  Marks 


4,000,000 
2,500,000 
2,200,000 
2,400,000 

5,500,000 
366,000 
250,000 

500,000 
3,500,000 

500,000 
3,500,000 

250,000 
2,000,000 
4,500,000 
21,700,000 


The  Bank  and  its  controlled  subsidiaries  are  reported  to 
have  had  important  stock  interests  in  no  less  than  80  under- 
takings in  the  electrical  industry  which  enabled  it  to  paj^ 
a  10  per  cent  dividend.     This  company,  however,  is  only 


374  COMBINATION    ORGANIZATIONS 

one  of  many  finance  and  assumption  companies  connected 
with  the  Allgemeine  Elektrizitatsgesellschaft. 

The  finance  company  seldom  stands  alone.  It  is  gen- 
erally more  or  less  closely  connected  with  one  or  more 
assumption  companies  whose  purpose  it  is  to  afford  it  an 
outlet  for  the  securities  acquired  through  finance  opera- 
tions. So  we  find  the  Schaffhausensche  Bankverein,  a 
finance  institution  employing  the  Internationale  Bahn- 
gesellschaft  as  an  assumption  and  control  company  to  re- 
lieve it  of  its  securities  in  potash  mining  and  refining 
companies.  Similar  companies  are  to  be  found  in  the 
group  of  concerns  engaged  in  the  construction  and  opera- 
tion of  local  and  street  railways,  the  electrical,  chemical 
and  petroleum  industries. 

This  inter-relation  of  companies  is  well  illustrated  by 
the  Lenz  Group.  At  the  head  stands  Lenz  &  Company, 
G.  m.  b.  H.,^  a  concern  engaged  in  the  manufacture  of  rail- 
way equipment  and  the  construction  and  operation  of  local 
railways.  This  company,  with  the  assistance  of  two  banks, 
successively  organized  six  finance  and  assumption  com- 
panies, as  illustrated  in  the  diagram  on  opposite  page. 

A  similar  group  built  up  by  the  Dresdener  Bank,  also 
for  railway  construction  and  operation,  is  depicted  by 
Professor  Liefmann  as  follows: 

Dresdener  Bank  and 

Bass  &  Herz  Bank 

Gesellschaft       fiir       Industrielle  Investment  and  later  a  general 

Unternehmungen  finance  company 

Aktiengcsellschaft    fiir    Bahnbau  Finance  company  specializing  in 

u.  Betrieb  railway  construction 

Deutsche    Eisenbahngesellschaft  1st  assumption  company 

Industriebahn-Aktiengesellschaft  2nd  assumption   company 

Local   railways   in   Ilijxtcr,   etc.  Operating  companies 

•'■  G.  m.  b.  H.  is  an  abbreviation  of  Gesellschaft  mit  beschrankter 
Haftung  (a  company  with  limited  liability).  It  corresponds  in 
general  to  our  corporation. 


FINANCE  AND   ASSUMPTION   COMPANIES     375 

The  two  great  German  electric  companies,  namely,  the 
Allgemeine  Elektrizitiitsgesellschaft  and  the  Siemens- 
Schuckert  concern  have  made  lavish  use  of  these  two  types 
of  companies.  In  1915,  the  former  had  no  less  than  35 
participation  and  selling  subsidiaries  of  which  the  Bank 


ASSUMPTION  AND   FINANCE   COnPANIES  OF  THE  LENZ  GROUP  OF  GERMANY 
ENGAGED     IN     RAILROAD    CONSTRUCTION  AND    OPERATION 


ffa/nod  equipment'  rnafiu- 
foc taring  and  construct-  + 
ion  oomfian^. 


Assumfitien  company-^ 


Assumphon,  mining  _^ 
<  devetopnjfnt  ayn/Mintf. 


/^dependent  finance 
company 


BERLINER  WNm.\.^Alndepenaent 

]f/nance  compony. 


{Assamption  and  finance 
'-{company-  later  also  engaged 
\in  comfruction  and  Operation. 


<  ^Assumption  and  finance 
I  company. 


Assumption  company,  also 
constructs  and  operatex 


AOperati'ng,  assumption  and 
X'nuestment  compant^. 


*  Lem  t  Co/npony's  interest  in  t/ie  first  three   companies  u/as  transferred  fo  the 
Alitiengeselisctiaftfurl/l'rHetirsuiesen  on  the  fcrmafioncf  tfielatterin/901. 


Data  from  ft.Llefmonn's  Befeilisunss- 
und  finomierungs^esel/xho/Ven. 


AH.STOCKDEff. 


fiir  Elektrische  Unternehmungen,  previously  described,  is 
but  one,  while  the  latter  had  25  of  which  12  were  purely 
assumption  or  finance  companies.  The  enormous  extent 
of  substitution  of  securities  brought  about  through  the 
Allgemeine  Elektrizitlitsgesellschaft  is  commented  upon  by 
Professor  Liefmann  as  follows:     "Of  the  total  mass   of 


376  COMBINATION    ORGANIZATIONS 

securities  issued  by  the  A.  E.  G.,  which,  though  difficult  to 
estimate  accurately,  can  hardly  amount  to  less  than  one 
billion  marks,  perhaps  one  half,  or  surely  between  500  and 
600  million  marks,  consists  of  securities,  that  in  turn  are 
supported  by  others.  These  are  the  securities  of  the  par- 
ticipation companies  and  of  all  of  the  (subsidiary)  manu- 
facturing companies  which,  like  the  A.  E.  G.  itself,  are  to 
a  large  extent  also  participation  companies."  "^ 

The  European  Petroleum  Union  was  similarly  supplied. 
Among  its  finance  companies  were  the  Ungarische  Bank 
fiir  Industrie  und  Handel,  the  Internationale  Petroleum- 
gesellschaft,  the  Roumanian  Trust  and  the  Societe  beige 
de  petrole,  while  the  Vienna  Banking  Association  and  the 
Deutsche  Bank  also  aided  in  financing  the  combine.  The 
Deutsche  Bank  had  as  its  chief  petroleum  securities 
assumption  company  the  Deutsche  Petroleum-Aktien- 
gesellschaft  through  which  it  participated  in  most  of  the 
larger  European  producing  and  distributing  companies 
belonging  to  the  Union. 

Finance  and  Assumption  Companies  in  Other  Countries, 
—  While  finance  and  assumption  companies  are  to  be  found 
in  nearly  all  countries  where  the  principle  of  substitution 
of  securities  has  received  the  sanction  of  law,  they  are 
nowhere  else  as  characteristic  of  the  industrial  organization 
as  in  Germany  and  Belgium.  Nevertheless,  in  England, 
Switzerland,  France  and  other  European  countries  there 
are  many  excellent  examples. 

Among  the  English  finance  companies  the  two  great  min- 
ing groups  of  South  Africa  and  several  of  their  subsidiaries 
and  affiliated  companies  deserve  consideration. 

The  first  of  these  is  the  famous  Cecil  Rhodes  Group, 
which,  in  1915,  included  as  its  chief  finance  and  investment 
companies  the  following: 

c  Ibid.  p.  479     (Translation  by  the  author). 


FINANCE   AND   ASSUMPTION    COMPANIES     377 

(1)  Consolidated  Goldfields  of  South  Africa,  Ltd.,  formed  in 
1892  by  fusion  of  the  Goldfields  of  South  Africa,  Ltd.,  and 
the  African  Gold  Share  Livestment  Company,  Ltd.,  as 
head  of  the  group. 

(2)  South  African  Gold  Trust,  formed  in  1894  by  the  C.  G.  of 
S.  AJ  as  an  assumption  and  investment  company. 

(3)  Gold  Finance  Company,  formed  in  1898  by  the  C.  G.  of 
S.  A.  as  an  assumption  and  investment  company,  but 
since  liquidated. 

(4)  Rhodesia  Exploration  and  Development  Company,  Ltd., 
formed  by  the  C.  G.  of  S.  A.  in  1895  as  a  finance  and 
investment  company  which  in  1910  absorbed  the  London  & 
Johannesburg  Trust  Company,  the  Rhodesia  Banket  Com- 
pany, the  Etna  Development  Company,  the  Rhodesian 
Abercorn  Shamva  Trust  Company,  and  the  Gold  Schists 
of  Rhodesia. 

(5)  Gold  Mines  Investment  Company,  Ltd.,  acquired  in  1905 
by  the  C.  G.  of  S.  A.  as  a  finance  and  investment  company. 

(6)  Goldfields  Rhodesia  Development  Company,  Ltd.,  formed 
in  1911  by  the  C.  G.  of  S.  A.  as  an  assumption  company 
to  take  over  a  large  portion  of  its  South  African  holdings 
including  the  Rhodesian  Exploration  &  Development 
Company. 

(7)  Goldfields-American  Development  Company,  formed  in 
1911  by  the  C.  G.  of  S.  A.  to  take  over  its  American 
interests. 

Through  these  subsidiary  and  controlled  companies,  the 
Consolidated  Goldfields  of  South  Africa  participates  in 
the  earning  and  losses  of  perhaps  more  than  one  hundred 
other  companies  including  among  numerous  mining  and 
development  undertakings  also  some  finance,  investment 
and  assumption  companies. 

A  similar  group  of  finance  and  assumption  companies  — 

also  in  the  mining  industry  —  is  that  organized  by  Barnato, 

Joel  and  their  associates.     At  the  head  of  this  group  stands 

■^  C.  G.  of  S.  A.  is  the  ConsoHdated  Goldfields  of  South  Africa, 
Limited. 


378  COMBINATION    ORGANIZATIONS 

the  Johannesburg  Consolidated  Investment  Company,  Ltd., 
formed  in  1889  as  an  assumption  and  finance  company. 
Among  its  controlled  companies  are  the  famous  De  Beers 
Consolidated  Mines  and  numerous  other  South  African 
enterprises.  It  also  has  extensive  holdings  in  many  of  the 
companies  in  which  the  Consolidated  Goldfields  of  South 
Africa  also  is  interested. 

A  few  English  finance  companies  also  have  been  formed 
to  aid  in  the  promotion  and  development  of  East  India 
rubber  plantations  and  for  colonial  development. 

In  Switzerland  we  find  the  Bank  fiir  Orientalische  Eisen- 
bahnen,  organized  in  Zurich  by  an  international  bank 
consortium;  the  Union  Ottomane,  Societe  pour  enterprises 
electriques  en  Orient,  emanating  from  the  Deutsche  Bank; 
the  Schweitzerische  Eisenbahnbank;  the  Union  finauQiere 
de  Geneve;  the  Societe  finangiere  pour  enterprises  elec- 
triques aux  Etats  Unis  and  numerous  others. 

In  Belgium  there  are  a  large  number  of  such  companies 
interested  in  promoting  and  financing  local  and  street  rail- 
ways, electric  light  and  power  works,  and  a  few  that  do  not 
specialize  in  undertakings  confined  to  a  single  industry. 
Among  the  latter  the  most  important  one  is  the  Societe 
generale  de  Belgique,  which  was  first  organized  in  1822 
as  an  investment  company  under  the  name  Societe  generale 
des  Pays-Bas.  In  1830,  this  was  changed  to  Societe 
generale  pour  favoriser  I'industrie  nationale.  It  adopted 
its  present  name  in  1903. 

Evaluation  of  Finance  and  Assumption  Companies. — 
We  have  seen  that  the  modern  large  business  unit,  rcciuir- 
ing  as  it  does  enormous  sums  of  ready  money  capital  that 
must  be  available  to  it  at  a  stated  time,  must  be  financed. 
The  investable  funds  of  a  country  are  usually  in  the  hands 
of  banks  and  trust  companies  whose  business  it  is  to  deal 
in  money  capital ;  consequently  the  institution  which  under- 
takes to  finance  big  business  enterprises  must  bridge  the 


FINANCE   AND   ASSUMPTION   COMPANIES     379 

gaps  between  the  underlying  economic  capital  of  industry 
and  the  money  capital. 

We  have  also  seen  that  this  financing  may  be  undertaken 
by  industrial  corporations  themselves,  by  underwriting 
syndicates  representing  banking  institutions  or  by 
securities-issuing  finance  companies;  and  that,  while  the 
performance  of  the  function,  when  undertaken  by  the 
syndicate,  need  not  go  beyond  primary  securitization  of 
basic  capital,  it,  nevertheless,  frequently  involves  the 
substitution  of  securities  resulting  from  the  performance 
of  the  function  by  securities-issuing  organizations. 

These  circumstances  give  birth  to  peculiar  institutions 
and  new  problems.  While  the  underwriting  syndicate  is 
but  a  temporary  voluntary  association  possessing  a  highly 
elastic  capital,  the  finance  company  is  a  permanent  organ- 
ization with  a  fixed  capitalization  that  can  not  be  changed 
except  as  prescribed  by  law.  Once  having  undertaken  a 
finance  transaction  converting  its  funds  into  securities, 
the  syndicate  tries  to  sell  these  to  investors  at  a  profit. 
If  it  fails  it  simply  apportions  to  each  member  his  propor- 
tionate share  and  dissolves.  Then  a  new  syndicate  is 
formed  to  undertake  the  next  venture.  Here,  the  finance 
company  is  at  a  disadvantage.  It  is  obliged  to  keep  a 
steady  stream  of  securities  flowing  through  it  in  order  to 
enable  it  to  continue  operations.  It  may,  of  course,  sell 
the  acquired  securities  to  investors  or  keep  them,  issuing 
bonds  to  secure  new  capital.  If  it  is  an  independent  con- 
cern, it  obviously  has  a  considerable  freedom  of  choice; 
but  the  fact  remains  that  most  finance  companies  are  the 
key-links  of  the  chain  that  binds  the  industrial  enterprise 
to  its  source  of  funds.  Their  purpose,  therefore,  is  two- 
fold, namely:  on  the  one  hand,  to  furnish  capital  and,  on 
the  other,  to  serve  as  the  web  of  the  fabric  that  unifies  an 
industry.  This  circumstance  limits  their  freedom  of 
action,  and  they  are  forced  to  devise  some  means,  consistent 


380  COMBINATION    ORGANIZATIONS 

with  their  two-fold  purpose,  that  will  enable  them  to  throw 
off  a  surplus  of  acquired  securities  in  order  to  finance  new 
undertakings.  The  institution  that  has  so  cleverly  been 
devised  to  perform  this  new  function  is  the  assumption 
company. 

Without  the  use  of  the  assumption  company  the  finance 
company  would  eventually  become  nothing  more  than  a 
control  or  an  investment  company,  depending  upon  the 
per  cent  of  securities  of  financed  concerns  that  it  possesses; 
and  sooner  or  later  it  must  step  in  to  supervise  the  opera- 
tion of  controlled  companies  to  serve  its  own  interests. 
In  other  words,  it  would  soon  lose  the  character  of  a  finance 
company.  But,  by  successively  organizing  new  assump- 
tion companies,  either  by  itself  or  in  conjunction  with  the 
banks  and  industrials  that  it  serves,  it  is  in  a  position  to 
perpetuate  its  existence  as  a  finance  company  indefinitely. 

However,  the  risk  of  loss  entailed  in  financing  new  enter- 
prises is  a  great  one.  The  profits  from  one  venture  may 
be  wiped  out  completely  by  the  losses  from  another.  Con- 
sequently, the  capital  assets  of  the  finance  companies, 
because  of  the  constant  change  of  securities,  are  subject  to 
extreme  fluctuations.  It  is  unlike  that  of  an  industrial 
corporation,  or  of  an  investment  or  control  company  whose 
assets  tend  to  remain  more  fixed  in  character.  Today,  the 
finance  company's  assets  may  consist  largely  of  the  securi- 
ties of  corporation  A,  which  it  has  just  financed,  and  a  few 
months  hence,  they  are  chiefly  composed  of  the  securities 
of  company  B.  The  stockholders  of  such  ai  company 
never  know  of  just  what  securities  the  capital  consists  and 
have  no  means  of  ascertaining  the  financial  standing  of 
their  company,  unless  it  were  to  render  reports  at  very  fre- 
quent intervals.  Furthermore,  the  value  ascribed  to  securi- 
ties purchased  by  finance  companies  in  exchange  for  invest- 
ment funds  is  itself  a  speculation.  The  price  per  unit  in 
such  cases  is  not  established  by  the  free  play  of  the  forces 


FINANCE    AND   ASSUMPTION    COMPANIES     381 

of  demand  and  supply  characteristic  of  exchange  quota- 
tions, but  is  an  arbitrary  price,  based  upon  the  results  of 
a  survey  of  the  prospects  of  success  or  failure  of  the 
financed  enterprise. 

Under  circumstances  such  as  these,  the  independent 
finance  company  can  be  made  to  appeal  to  investors  only 
where  there  is  either  a  chance  for  enormous  profit,  as  in 
mining  and  tropical  exploration  enterprises  whose  specu- 
lative character  is  generally  recognized,  or  in  countries 
where  the  commercial  laws  are  such  as  to  afford  the  highest 
degree  of  protection  to  investors  through  provisions  that 
require  full  publicity  as  to  the  character  of  the  securities 
possessed  by  the  companies  and  of  the  assets  that  underlie 
them.  In  no  country  are  the  laws  on  these  points  suf- 
ficiently firm  and  exacting,  though  those  of  Germany  and 
Belgium  most  nearly  approach  the  desired  end.  The  in- 
dependent finance  company  is,  therefore,  largely  a  specu- 
lative enterprise,  that,  through  a  judicious  use  of  the 
assumption  company,  can  often  diminish  the  risk  some- 
what by  foisting  its  less  desirable  securities  off  on 
the  latter. 

The  subsidiary  finance  company,  including  such  as  have 
been  formed  jointly  by  banking  institutions  and  industrials 
to  build  up  an  industry  on  sound  business  principles,  stands 
in  a  better  position.  It  is  merely  a  convenient  and  admir- 
ably adapted  tool  to  facilitate  industrial  development. 
It  confines  its  activities  to  the  industry  that  it  serves  acting 
both  as  a  financial  agent  and  as  a  sort  of  mortar  to  hold 
the  individual  bricks  of  the  industrial  house  together, 
while  the  several  assumption  companies  that  may  emanate 
from  it  strengthen  rather  than  weaken  its  position.  But, 
at  the  same  time,  if  the  general  public  is  to  be  induced  to 
invest  in  such  enterprises,  it  must  be  afforded  much  greater 
protection  by  law  than  it  now  has.  This  is  especially  true 
of  the  United  States,  where  the  present  system  of  corpora- 


382  COMBINATION    ORGANIZATIONS 

tion  laws  is  quite  inadequate.  Until  such  time  as  our  laws 
are  strengthened  with  a  view  to  protecting  investors,  the 
use  of  finance  companies  in  this  country  must  continue  to 
be  restricted  to  the  few  industries  that  do  their  own 
financing  and  where  they  will  remain  very  largelj^  as  owned 
or  controlled  companies  whose  securities,  other  than  bonds, 
will  not  ordinarily  find  their  way  to  the  general  public. 


CHAPTER  XIX 

TKE  GROWTH   AND   DEVELOPMENT   OF   A   MONOPOLISTIC 

CONTROL    COMPANY  — THE     AMERICAN     TOBACCO 

COMPANY 

A  STUDY  of  the  growth  and  development  of  one  of  the 
great  monopolistic  control  companies  that  are  such  charac- 
teristic features  of  the  American  system  of  business  owner- 
ship will  serve  to  illustrate  the  great  variety  of  methods 
that  have  been  employed  in  building  up  combinations  of 
this  type.  The  history  of  the  Standard  Oil  Company,  of 
the  United  States  Steel  Corporation,  of  the  American  To- 
bacco Company  and  others  are  available  for  this  purpose, 
but  the  limits  of  this  work  are  such  as  to  preclude  a 
description  of  more  than  one  of  them.  The  brief  sketch 
of  the  growth  of  the  American  Tobacco  Company,  given 
in  the  decision  of  the  Supreme  Court  of  the  United  States, 
declaring  this  company  to  be  a  combination  in  violation 
of  the  Sherman  Anti-Trust  Act,  is  so  admirably  suited  to 
this  purpose  that  it  is  here  reprinted  in  full.^  The  court 
recounted  the  undisputed  facts  as  follows: 

"  The  matters  to  be  considered  under  this  heading  we 
think  can  best  be  made  clear  by  stating  the  merest  out- 
line of  the  condition  of  the  tobacco  industry  prior  to  what 
is  asserted  to  have  been  the  initial  movement  in  the  com- 
bination which  the  suit  assails  and  in  the  light  so  afforded 
to  briefly  recite  the  history  of  the  assailed  acts  and  con- 
tracts. We  shall  divide  the  subject  into  two  periods, 
(a)  the  one  from  the  time  of  the  organization  of  the  first 

1  United  States  oj  America  v.  American  Tobacco  Company,  221 
U.  S.,  106,  pp.  155-183. 

383 


384  COMBINATION    ORGANIZATIONS 

or  old  American  Tobacco  Company  in  1890  to  the  organi- 
zation of  the  Continental  Tobacco  Company,  and 
(6)  from  the  date  of  such  organization  to  the  filing  of  the 
bill  in  this  case. 

"  Summarizing  in  the  broadest  way  the  conditions  which 
The  tobacco  obtained  prior  to  1890,  as  to  the  production, 
industry  manufacture  and  distribution  of  tobacco,  the 

F"?L-,  following     general     facts     are     adequate"'  to 

to  1890.  .  Ti        •.      X- 

portray  the  situation. 

"  Tobacco  was  grown  in  many  sections  of  the  country 
having  diversity  of  soil  and  climate  and  therefore  was 
subject  to  various  vicissitudes  resulting  from  the  places  of 
production  and  consequently  varied  in  quality.  The  great 
diversity  of  use  to  which  tobacco  was  applied  in  manufac- 
turing caused  it  to  be  that  there  was  a  demand  for  all  the 
various  qualities.  The  demand  for  all  qualities  was  not 
local,  but  widespread,  extending  as  well  to  domestic  as  to 
foreign  trade,  and  therefore,  all  the  products  were  marketed 
under  competitive  conditions  of  a  peculiarly  advantageous 
nature.  The  manufacture  of  the  product  in  this  country 
in  various  forms  was  successfully  carried  on  by  many  in- 
dividuals or  concerns  scattered  throughout  the  country, 
a  larger  number  perhaps  of  the  manufacturers  being  in  the 
vicinage  of  production  and  others  being  advantageously 
situated  in  or  near  the  principal  markets  of  distribution. 

"Before  January,  1890,  five  distinct  concerns  —  Allen  & 
Ginter,  with  factory  at  Richmond,  Va.;  W.  Duke,  Sons  & 
Co.,  with  factories  at  Durham,  North  Carolina,  and  New 
York  City;  Kinney  Tobacco  Company,  with  factory  at 
New  York  City;  W.  S.  Kimball  &  Company,  with  factory 
at  Rochester,  New  York;  Goodwin  &  Company,  with  fac- 
tory at  Brooklyn,  New  York  —  manufactured,  distributed 
and  sold  in  the  United  States  and  abroad  95  per  cent  of  all 
the  domestic  cigarette  and  less  than  8  per  cent  of  the 
smoking  tobacco  produced  in  the  United  States.  There  is 
no  doubt  that  these  factories  were  competitors  in  the  pur- 
chase of  the  raw  product  which  they  manufactured  and  in 
the  distribution  and  sale  of  the  manufactured  products. 
Indeed  it  is  shown  that  prior  to  1890  not  only  had  normal 


A  MONOPOLISTIC   CONTROL   COMPANY      385 

and  ordinary  competition  existed  between  the  factories  in 
question,  but  that  the  competition  had  been  fierce  and 
abnormal.  In  January,  1890,  having  agreed  upon  a  capital 
stock  of  $25,000,000,  all  to  be  divided  amongst  them,  and 
Amalgama-  who  should  be  directors,  the  concerns  referred 
tion  of  five  to  organized  the  American  Tobacco  Company 
manSactur-  ^^  ^^^^^  Jersey,  '  for  trading  and  manufactur- 
ing concerns  ing,'  with  broad  powers,  and  conveyed  to  it 
into  the  ^he  assets  and  businesses,  including  good  will 

Tobacco  Co.  and  right  to  use  the  names  of  the  old  con- 
(1890).  cerns;  and  thereafter  this  corporation  carried 

on  the  business  of  all.  The  $25,000,000  of  stock  of  the 
Tobacco  Company  was  allotted  to  the  charter  members  as 
follows:  Allen  &  Ginter,  $3,000,000  preferred,  $4,500,000 
common;  W.  Duke,  Sons  &  Co.,  $3,000,000  preferred,  $4,- 
500,000  common;  Kinney  Tobacco  Company,  $2,000,000 
preferred,  $3,000,000  common;  W.  S.  Kimball  &  Co., 
$1,000,000  preferred,  $1,500,000  common;  and  Goodwin  & 
Co.,  $1,000,000  preferred,  $1,500,000  common. 

"  There  is  a  charge  that  the  valuation  at  which  the  re- 
spective properties  were  capitalized  in  the  new  corporation 
was  enormously  in  excess  of  their  actual  value.  We,  how- 
ever, put  that  subject  aside,  since  we  propose  only  to  deal 
with  facts  which  are  not  in  controversy. 

"  Shortly  after  the  formation  of  the  new  corporation  the 
Goodwin  &  Co.  factory  was  closed  and  the  directors  ordered 
'  that  the  manufacture  of  all  tobacco  cigarettes  be  concen- 
trated at  Richmond.'  The  new  corporation  in  1890,  the 
first  year  of  its  operation,  manufactured  about  two  and 
one-half  billion  cigarettes,  that  is,  about  96  or  97  per  cent 
of  the  total  domestic  output,  and  about  five  and  one-half 
million  pounds  of  smoking  tobacco  out  of  a  total  domestic 
product  of  nearly  seventy  million  pounds. 

"  In  a  little  over  a  year  after  the  organization  of  the 
company  it  increased  its  capital  stock  by  ten  million 
dollars.  The  purpose  of  this  increase  is  inferable  from  the 
considerations  which  we  now  state. 

"  There  was  a  firm  known  as  Pfingst,  Docrhoefer  &  Co., 
consisting  of  a  number  of  partners,  who  had  been  long  and 


386  COMBINATION    ORGANIZATIONS 

successfully  carrying  on  the  business  of  manufacturing 
Enters  the  P^^S  tobacco  in  Louisville,  Kentucky,  and  dis- 
plug  tobacco  tributing  it  through  the  channels  of  interstate 
business.  commerce.     In  January,   1891,  this  firm  was 

^    '^^  *    converted   into   a    corporation   known   as   the 

National  Tobacco  Works,  having  a  capital  stock  of 
$400,000  all  of  which  was  issued  to  the  partners.  Almost 
immediately  thereafter,  in  the  month  of  February,  the 
American  Tobacco  Company  became  the  purchaser  of  all 
the  capital  stock  of  the  new  corporation,  paying  $600,000 
cash  and  $1,200,000  in  stock  of  the  American  Tobacco 
Company.  The  members  of  the  previously  existing  firm 
bound  themselves  by  contract  with  the  American  Tobacco 
Company  to  enter  its  service  and  manage  the  business 
and  property  sold,  and  each  further  agreed  that  for  ten 
years  he  would  not  engage  in  carrying  on,  directly  or  in- 
directly, or  permit  or  suffer  the  use  of  his  name  in  connec- 
tion with  the  carrying  on  of  the  tobacco  business  in  any 
form. 

"  In  April  following,  the  American  Tobacco  Company 
bought  out  the  business  of  Philip  Whitlock,  of  Richmond, 
Enters  cigar  Virginia,  who  was  engaged  in  the  manufacture 
and  cheroot  of  cheroots  and  cigars,  and  with  the  exclusive 
(A^priT^'  right  to  use  the  name  of  Whitlock.  The  con- 
1891).  sideration  for  this  purchase  was  $300,000,  and 

Wliitlock  agree  to  become  an  employee  of  the  American 
Tobacco  Company  for  a  number  of  years  and  not  to  en- 
gage for  twenty  years  in  the  tobacco  business. 

"  In  the  month  of  April  the  American  Tobacco  Company 
also  jfcquired  the  business  of  Marburg  Brothers,  a  well 
Enters  known  firm  located  at  Baltimore,  Maryland, 

smoking  and  engaged  in  the  manufacture  and  distribu- 

tobacco  and  |jy^^  ^f  tobacco,  principally  smoking  and  snuff, 
business.  The    consideration    was    a    cash    payment    of 

(April,  ■  $164,627.65  and  stock  to  the  amount  of  $3,075,- 
1891).  QQQ     rpj^^  members  of  the  firm  also  conveyed 

the  right  to  the  use  of  the  firm's  name  and  agreed  not  to  en- 
gage in  the  tobacco  business  for  a  lengthy  period. 

"  Again,   in   the   same   month,   the   American   Tobacco 


A  MONOPOLISTIC   CONTROL   COMPANY      387 

Company  bought  out  a  tobacco  firm  of  old  standing,  also 
located  in  Baltimore,  known  as  G.  W.  Gail  &  Ax,  engaged 
principally  in  manufacturing  and  selling  smoking  tobacco, 
buying  with  the  business  the  exclusive  right  to  use  the 
name  of  the  firm  or  the  partners,  and  the  members  of  the 
firm  agreed  not  to  engage  in  the  tobacco  business  for  a 
specified  period.  The  consideration  for  this  purchase  was 
$77,582.66  in  cash  and  stock  to  the  amount  of  $1,760,000. 
The  plant  was  abandoned  soon  after. 

"  The  result  of  these  purchases  was  manifested  at  once 
in  the  product  of  the  company  for  the  year  1891,  as  will 
appear  from  the  note  in  the  margin-^    It  will  be  seen  that 

Number  Pounds 

Cigarettes      2,788,788,000 

Cheroots  and  little  cigars  40,009,000 

Smoking    13,813,354 

Fine  cut    560,633 

Snuff     383,162 

Plug    4,442,774 

Total  output  jor  the  United  States,  1891 

Cigarettes     3,137,318,596        

Smoking    13,813,355 

Fine   cut    16,968,870 

Plug  and  twist    166,177,951 

Snuff     10,674,241 

as  to  cheroots,  smoking  tobacco,  fine  cut  tobacco,  snuff  and 
plug  tobacco,  the  company  had  become  a  factor  in  all 
branches  of  the  tobacco  industry. 

"  Referring  to  the  occurrences  of  the  year  1891,  as  in  all 
respects  typical  of  the  occurrences  which  took  place  in  all 
the  other  vears  of  the  first  period,  that  is  during  the  years 
1892,  1893,  1894,  1895,  1896,  1897,  and  1898,  we  content 
ourselves  with  saying  that  it  is  undisputed  that  between 
February,  1891,  and  October,  1898,  including  the  purchases 
which  we  have  specifically  referred  to,  the  American  To- 
bacco Company  acquired  fifteen  going  tobacco  concerns 
doing  business  in  the  States  of  Kentucky,  Louisiana,  Mary- 
land, Michigan,  Missouri,  New  York,  North  Carolina,  and 

2  The  output  of  the  American  Tobacco  Company  for  1891 : 


388  COMBINATION    ORGANIZATIONS 

Virginia.  For  ten  of  tlie  plants  an  all  cash  consideration  of 
$6,410,235.26  was  paid,  while  the  payments  for  the  remain- 
ing five  aggregated  in  cash  $1,115,100.95  and  in  stock  $4,- 
123,000.  It  is  worth  noting  that  the  last  purchase,  in 
October  1898,  was  of  the  Drummond  Tobacco  Companj^,  a 
Missouri  corporation  dealing  principally  in  plug,  for  which 
a  cash  consideration  was  paid  of  $3,457,500. 

"  The  corporations  which  were  combined  for  the  purpose 
of  forming  the  American  Tobacco  Company  produced  a 
very  small  portion  of  plug  tobacco.  That  an  increase  in 
this  direction  was  contemplated  is  manifested  by  the  al- 
most immediate  increase  of  the  stock  and  its  use  for  the 
purpose  of  acquiring,  as  we  have  indicated,  in  1891  and 
1892,  the  ownership  and  control  of  concerns  manufacturing 
plug  tobacco  and  the  consequent  increase  in  that  branch  of 
production.  There  is  no  dispute  that  as  early  as  1893  the 
president  of  the  American  Tobacco  Company,  by  authority 
of  the  corporation,  approached  leading  manufacturers  of 
plug  tobacco  and  sought  to  bring  about  a  combination  of 
,,  the  plug  tobacco  interests,  and  upon  the  failure 

tobacco^ war "  ^0  accomplish  this,  ruinous  competition,  by 
and  the  lowering  the  price  below  its  cost,  ensued.    As 

formation  .^  result  of  this  warfare,  which  continued  until 
Continental  1898,  the  American  Tobacco  Company  sus- 
Tobacco  Co.  tained  severe  losses  aggregating  more  than  four 
(1898).  millions  of  dollars.     The  warfare  produced  its 

natural  result,  not  only  because  the  company  acquired 
during  the  last  two  years  of  the  campaign,  as  we  have 
stated,  control  of  important  plug  tobacco  concerns,  but 
others  engaged  in  that  industry  came  to  terms.  We  say 
this  because  in  1898,  in  connection  with  several  leading 
plug  manufacturers,  the  American  Tobacco  Company  or- 
ganized a  New  Jersey  corporation  styled  the  Continental 
Tobacco  Company,  for  "  trading  and  manufacturing,"  with 
a  capital  of  $75,000,000,  afterwards  increased  to  $100,- 
000,000.  The  new  company  issued  its  stock  and  took  trans- 
fers to  the  plants,  assets  and  businesses  of  five  large  and 
successful  competing  plug  manufacturers.^ 

3  P.  J.  Sorg  Co.,  having  factory  at   Middletown,  Ohio,  who  re- 


A  MONOPOLISTIC   CONTROL   COMPANY      389 

"  The  American  Tobacco  Company  also  conveyed  to  this 

corporation,  at  large  valuations,  the   assets,  brands,  real 

Transfer  of     estate   and    good   will   pertaining  to   its   plug 

plug  business  tobacco     business,     including     the     National 

}?  ^I".^  ,  ,  Tobacco  Works,  the  James  G.  Butler  Tobacco 
Continental  '  , 

Tobacco  Co.   Co.,     Drmmnond     Tobacco     Company,     and 

Brown  Tobacco  Co.,  receiving  as  consideration  $30,274,200 
of  stock  (one-half  common  and  one-half  preferred), 
$300,000  cash,  and  an  additional  sum  for  losses  sustained 
in  the  plug  business  during  1898,  $840,035.  Mr.  Duke, 
the  president  of  the  American  Tobacco  Company,  also 
became  president  of  the  Continental  Company. 

"  Under  the  preliminary  agreement  which  was  made 
looking  to  the  formation  of  the  Continental  Tobacco  Com- 
pany, that  company  acquired  from  the  holders 
Continental  ^11  the  $3,000,000  of  the  common  stock  of  the 
Tobacco  Co.  P.  Lorillard  Company  in  exchange  for  $6,000,- 
?ontror  ^^^  °^  ^^^  ^^°^^'  and' $1,581,300  of  the  $2,000,- 

over  the  000  preferred  in  exchange  for  notes  aggregating 

P.  Lorillard  a  sum  considerably  larger.  The  Lorillard 
^°'  Company,   however,   although   it  thus  passed 

practically  under  the  control  of  the  American  Tobacco 
Company  by  virtue  of  its  ownership  of  stock  in  the  Con- 
tinental Company,  was  not  liquidated,  but  its  business 
continued  to  be  conducted  as  a  distinct  corporation,  its 
goods  being  marked  and  put  upon  the  market  just  as  if 
they  were  the  manufacture  of  an  independent  concern. 


ceived  preferred  stock  $4,350,000,  common  stock  $4,525,000,  and 
cash  $224,375. 

John  Finzer  and  Brothers,  having  factory  at  Louisville,  Ky., 
who  received  preferred  stock  $2,250,000,  common  stock  $3,050,000, 
and  cash  $550,000. 

Daniel  Scotten  &  Co.,  having;  factory  at  Detroit,  Mich.,  who 
received  preferred  stock  $1,911,100,  and  common  stock  $3,012,500. 

P.  H.  Mayo  &  Bros.,  havinji  factory  at  Richmond,  Va.,  who  re- 
ceived preferred  stock  $1,250,000,  common  stock  $1,925,000,  and 
cash  $66,125. 

John  Wright  Co.,  having  factory  at  Richmond,  Va.,  who  re- 
ceived preferred  stock  $495,000,  common  stock  $495,000,  and  cash 
$4,116.67. 


390  COMBINATION    ORGANIZATIONS 

"  Following  the  organization  of  the  Continental  Tobacco 
Company  the  American  Tobacco  Company  increased  its 
j.jjg  capital  stock  from  thirty-five  millions  of  dol- 

American  lars  to  seventy  millions  of  dollars,  and  de- 
Tobacco  Co.,  glared  a  stock  dividend  of  one  hundred  per 
capitaliza-  cent  on  its  common  stock,  that  is,  a  stock  divi- 
tion.  dend  of  $21,000,000. 

"  As  the  facts  just  stated  bring  us  to  the  end  of  the 
first  period  which  at  the  outset  we  stated  it  was  our  purpose 
to  review,  it  is  well  briefly  to  point  out  the  increase  in  the 
power  and  control  of  the  American  Tobacco  Company  and 
the  extension  of  its  activities  to  all  forms  of  tobacco  pro- 
ducts which  had  been  accomplished  just  prior  to  the  or- 
ganization of  the  Continental  Tobacco  Company.  Noth- 
Power  and  ing  could  show  it  more  clearly  than  the  follow- 
control  of  ing:  At  the  end  of  the  time  the  company  was 
can  Tobacco  rnanufacturing  86  per  cent  or  thereabouts  of 
Co.  in  1898.  all  the  cigarettes  produced  in  the  United  States, 
above  26  per  cent  of  all  the  smoking  tobacco,  more  than 
22  per  cent  of  all  plug  tobacco,  51  per  cent  of  all  little 
cigars,  6  per  cent  each  of  all  snuff  and  fine  cut  tobacco,  and 
over  2  per  cent  of  all  cigars  and  cheroots. 

"  A  brief  reference  to  the  occurrences  of  the  second 
period;  that  is,  from  and  after  the  organization  of  the 
_  Continental  Tobacco  Company  up  to  the  time 

period  of  0^  the  bringing  of  this  suit,  will  serve  to  make 
expansion  evident  that  the  transactions  in  their  essence 
begins,  1899.  ^^^^  ,^jj  ^|^g  characteristics  of  the  occurrences 
of  the  first  period. 

"  In  the  year  1899  and  thereafter  either  the  American  or 
the  Continental  company,  for  cash  or  stock,  at  an  aggregate 
cost  of  fifty  millions  of  dollars  ($50,000,000),  bought  and 
closed  up  some  thirty  competing  corporations  and  partner- 
ships  theretofore  engaged  in  interstate  and 
competing  foreijm  commerce  as  manufacturers,  sellers  and 
concerns  are  distributors  of  tobacco  and  related  commodi- 
acqmred.  ^.-^g^  ^^yQ  interested  parties  covenanting  not  to 
engage  in  the  business.  Likewise  the  two  corporations 
acquired  for  cash,  by  issuing  stock,  and  otherwise,  con- 


A  MONOPOLISTIC   CONTROL   COMPANY      391 

trol  of  many  competing  corporations  now  going  concerns, 
with  plants  in  various  States,  Cuba  and  Porto  Rico,  which 
manufactured,  bought,  sold  and  distributed  tobacco  prod- 
ucts or  related  articles  throughout  the  United  States  and 
foreign  countries,  and  took  from  the  parties  in  interest 
covenants  not  to  engage  in  the  tobacco  business. 

"  The  plants  thus  acquired  were  operated  until  the  mer- 
ger in  1904,  to  which  we  shall  hereafter  refer,  as  a  part  of 
the  general  system  of  the  American  and  Continental  com- 
panies. The  power  resulting  from  and  the  purpose  contem- 
plated in  making  these  acquisitions  by  the  companies  just 
referred  to,  however,  may  not  be  measured  by  considering 
alone  the  business  of  the  company  directly  acquired  since 
some  of  these  companies  were  made  the  vehicles,  as  repre- 
senting the  American  or  Continental  company,  for  acquir- 
ing and  holding  the  stock  of  other  and  competing  companies 
thus  amplifying  the  power  resulting  from  the  acquisitions 
directly  made  by  the  American  or  Continental  company, 
without  ostensibly  doing  so.  It  is  besides  undisputed  that 
in  many  instances  the  acquired  corporations  with  the  sub- 
sidiary companies  over  which  they  had  control  through 
stock  ownership  were  carried  on  ostensibly  as  independent 
concerns  disconnected  from  either  the  American  or  the 
Continental  company,  although  they  were  controlled  and 
owned  by  one  or  the  other  of  these  companies.  Without 
going  into  details  on  these  subjects,  for  the  sake  of  brevity, 
we  append  in  the  margin  a  statement  of  the  corporations 
thus  acquired  with  the  mention  of  the  competing  concerns 
which  such  corporations  acquired.^ 

"  It  is  of  the  utmost  importance  to  observe  that  the  ac- 
quisitions made  by  the  subsidiary  corporations  in  some 
cases  likewise  show  the  remarkable  facts  stated  above,  that 
is,  the  disbursement  of  enormous  amounts  of  money  to 
acquire  plants,  which  on  being  purchased  were  not  utilized 
but  were  immediately  closed.  It  is  also  to  be  remarked, 
that  the  facts  stated  in  the  memorandum  in  the  margin 
show  on  their  face  a  singular  identity  between  the  con- 
ceptions which   governed  the   transactions   of   this   latter 

*  Note  omitted. 


392  COMBINATION    ORGANIZATIONS 

period  with  those  which  evidently  existed  at  the  very  birth 
of  the  original  organization  of  the  American  Tobacco  Com- 
pany, as  exemplified  by  the  transactions  in  the  first  period. 
A  statement  of  particular  transactions  outside  of  those 
previously  referred  to  as  having  occurred  during  the  period 
New  in   question   will   serve   additionally   to   make 

controlled  the  situation  clear.  And  to  accomplish  tins 
companies  purpose  we  shall,  as  briefly  as  may  be  consis- 
organized.  tent  with  clarity,  separately  refer  to  the  facts 
concerning  the  organization  during  the  second  period  of 
the  five  corporations  which  were  named  as  defendants  in 
the  bill,  as  heretofore  stated  and  which  for  the  purpose 
of  designation  we  have  hitherto  classified  as  accessory  de- 
fendants, such  corporations  being  the  American  Snuff  Com- 
pany, American  Cigar  Company,  American  Stogie  Com- 
pany, MacAndrews  &  Forbes  Company  (licorice),  and 
Conley  Foil  Company. 

"  (!)•  The  American  Snuff  Company 

As  we  have  seen,  the  American  Tobacco  Company  at 
the  commencement  of  the  first  period  produced  a  very 
small  quantity  of  snuff.  Its  capacity,  however,  in  that 
regard  was  augmented  owing  particularly  to  the  forma- 
tion of  the  Continental  Tobacco  Company  and  the  ac- 
quisition of  the  Lorillard  Company,  by  which  it  came  to 
be  a  serious  factor  as  a  snuff  producer.  There  shortly 
ensued  an  aggressive  competition  in  the  snuff  business  be- 
tween the  American  Tobacco  Company,  with  the  force 
acquired  from  the  vantage  ground  resulting  from  the 
dominancy  of  its  expanded  organization,  and  others  in 
the  trade  operating  independently  of  that  organization. 
The  result  was  identical  with  that  which  had  previously 
arisen  from  like  conditions  in  the  past. 
The  snuff  "  In  March,   1900,   there  was   organized  in 

business  is  New  Jersey  a  corporation  known  as  the  Ameri- 
to^thl^Am.  ^^^  ^""ff  Company,  with  a  capital  of  $25,000,- 
Snuff  Co.  000,  one-half  preferred  and  one-half  common, 
which  took  over  the  snuff  business  of  the  P.  Lorillard  Com- 


A  MONOPOLISTIC   CONTROL   COMPANY      393 

pany,  Continental  Tobacco  Company  and  the  American 
Tobacco  Company,  with  that  of  a  h^rge  competitor,  viz: 
The  Atlantic  Snuff  Co.  The  stock  of  the  new  company  was 
thus  apportioned:  Atlantic  Snuff  Company,  preferred, 
$7,500,000,  common,  $25,000,000;^  P.  Lorillard  Company, 
preferred,  $1,124,700,  common,  $3,459,400;  The  American 
Tobacco  Company,  preferred,  $1,177,800,  common,  $3,227,- 
500;  Continental  Tobacco  Company,  preferred,  $197,500 
common,  $813,100.  The  stock  issued  to  the  Continental 
Tobacco  Company  and  the  defendants,  P.  Lorillard  Com- 
pany and  the  American  Tobacco  Company,  is  still  held 
by  the  latter,  and  they  have  at  all  times  had  a  controlling 
interest  in  the  Snuff  Company.  All  the  companies,  to- 
gether with  their  officers  and  directors,  covenanted  that 
they  would  not  thereafter  engage  as  competitors  in  the 
tobacco  business  or  the  manufacture,  sale,  or  distribution 
of  snuff. 

"  Among  the  assets  transferred  by  the  Atlantic  Snuff 
Company  to  American  Snuff  Company  were  all  the  shares 
($600,000)  of  W.  E.  Garrett  &  Sons,  Inc.,  then  and  now 
one  of  the  oldest  and  very  largest  producers  of  snuff,  for 
a  long  time  and  still  engaged  at  Yorkland,  Del.,  in  inter- 
state and  foreign  commerce  in  tobacco  and  its  products, 
and  which  controlled  through  stock  ownership  the  South- 
ern Snuff  Company,  Memphis,  Tenn.,  Dental  Snuff  Com- 
pany, Lynchburg,  Vn.,  and  Stewart-Ralph  Snuff  Company, 
Clarkeville,  Tenn.  The  separate  existence  of  W.  E.  Garrett 
&  Son,  Inc.,  has  been  preserved  and  its  business  conducted 
under  the  corporate  name.  In  March,  1900,  the  American 
Snuff  Company  acquired  all  the  shares  of  George  W.  Helme 
Company,  one  of  the  oldest  and  largest  producers  of  snuff 
and  actively  engaged  at  Helmetta,  N.  J.,  in  interstate  and 
foreign  commerce  in  competition  with  defendants,  by  issu- 
ing in  exchange  therefor  $2,000,000  preferred  stock  and 
$1,000,000  common;  and  it  thereafter  took  a  conveyance  of 
all  assets  of  the  acquired  company  and  now  operates  the 
plant  under  its  own  name. 

"  As  a  result  of  the  transactions  just  stated  it  came  to 
s  Thus  in  original.    Probably  $2,500,000. 


394  COMBINATION    ORGANIZATIONS 

pass  that  the  American  Tobacco  Company,  which  had  at 
the  end  of  the  first  period  only  a  very  small  percentage  of 
the  snuff  manufacturing  business,  came  virtually  to  have 
the  dominant  control  as  a  manufacturer  of  that  product. 

"  2.  Conley  Foil  Company  —  manufacturers  of  tin- 
foil, an  essential  for  packing  tobacco  products: 
In   December,    1899,  the  American   Tobacco   Company 
secured  control  of  the  business  of  John  Conley  &  Sons, 
a  partnership  of  New  York  City.     By  agree- 
tinfoii  ment   the   Conley   Foil   Company   was   incor- 

business.  porated  in  New  York  "  for  trading  and  manu- 
<^^^^)-  facturing,"      etc.,      with      $250,000      capital, 

ultimately  increased  to  $825,000.  The  corporation  took 
over  the  business  and  assets  of  the  firm,  and  the  American 
Tobacco  Company  became  owner  of  a  majority  of  the 
shares  of  stock.  The  Conley  Foil  Company  has  acquired 
all  the  shares  of  stock  of  the  Johnson  Tinfoil  &  Metal  Com- 
pany, of  St.  Louis,  a  leading  competitor,  and  they  supply 
under  fixed  contracts  at  remunerative  prices  the  tinfoil 
used  by  the  defendants,  which  constitutes  the  major  part 
of  the  total  production  in  the  United  States. 

"  3.  American  Cigar  Company: 
Prior  to  1901  the  American  and  Continental  tobacco 
companies  manufactured,  sold,  and  distributed  cigars, 
stogies,  and  cheroots.  In  the  year  stated  the 
turer"^and  companies  determined  to  engage  in  the  busi- 
dealers  in  ness  upon  a  larger  scale.  Under  agreement 
cigars  are  ^yith  Powell,  Smith  &  Company,  large  manu- 
anT^the^Am.  facturers  and  dealers  in  cigars,  they  caused  the 
Cigar  Co.,  is  incorporation  in  New  Jersey  of  the  American 
formed,  Cigar   Company   "  for   trading   and  manufac- 

turing," etc.,  to  which  all  three  conveyed  their 
said  business  and  it  has  since  carried  on  the  same.  The 
American  and  Continental  Companies  each  acquired  46^ 
per  cent  of  the  shares,  and  Powell,  Smith  &  Company  7 
per  cent;  the  original  capitalization  was  $10,000,000  (after- 
wards $20,000,000) ,  and  more  than  three-fourths  is  owned 


A  MONOPOLISTIC   CONTROL   COMPANY      395 

by  the  former-  The  Cigar  Company  acquired  many  com- 
petitors (partnerships  and  corporations)  engaged  in  inter- 
state and  foreign  commerce,  taking  from  the  parties  cove- 
nants against  engaging  in  the  tobacco  business;  and  it 
has  also  procured  the  organization  of  controlled  corpora- 
tions which  have  acquired  competing  manufacturers,  job- 
bers, and  distributors  in  the  United  States,  Cuba,  and  Porto 
Rico.  It  manufactures,  sells  and  distributes  a  considerable 
percentage  of  domestic  cigars;  is  the  dominating  factor  in 
the  tobacco  business,  foreign  and  domestic,  in  Cuba  and 
Porto  Rico,  and  is  there  engaged  in  tobacco  planting.  It 
also  controls  corporate  jobbers  in  California,  Alabama,  Vir- 
ginia, Pennsylvania,  Georgia,  Louisiana,  New  Jersey,  and 
Tennessee. 

"  4.    The  Mac  Andrews   &  Forbes   Company  —  manu- 
facturers of  licorice: 

There  is  no  question  that  licorice  paste  is  an  essential 
ingredient  in  the  manufacture  of  plug  tobacco,  and  that 
one  who  is  debarred  from  obtaining  such  paste 
co^ntroTof       would   therefore   be   unable   to   engage    in   or 
the  carry   on   the   manufacture   of   such   product, 

manufacture  The  control  over  this  article  was  thus  secured: 
(1902)"*^^'  ^^  May,  1902,  the  Continental  Company  se- 
cured control  of  MacAndrews  and  Forbes  Co., 
of  Newark,  New  Jersey,  and  organized  '  for  trading  and 
manufacturing '  a  corporation  known  as  the  MacAndrews 
&  Forbes  Co.,  with  a  capital  of  $7,000,000,  $4,000,000  pre- 
ferred and  $3,000,000  in  common,  which  took  over  the  busi- 
ness of  MacAndrews  and  Forbes  and  another  large  com- 
petitor. The  Continental  Company  acquired  two-thirds  of 
the  common  stock  by  agreeing  to  purchase  its  supply  of 
paste  from  the  new  company.  The  American  Tobacco 
Company,  at  the  time  of  the  filing  the  bill,  was  the  owner 
of  $2,112,900  of  the  common  stock  and  $750,000  preferred. 
By  various  purchases  and  agreements  the  MacAndrews  & 
Forbes  Company  acquired,  substantially,  the  business  of 
all  competitors.    Thus  in  June,  1902,  it  purchased  the  busi- 


396  COMBINATION    ORGANIZATIONS 

ness  of  the  Stamford  Mfg.  Co.,  of  Stamford,  Connecticut, 
and  incorporated  the  National  Licorice  Company,  which 
acquired  the  business  of  Young  &  Smylie  and  F.  B.  &  V.  P. 
Scudder,  and  the  National  Company  agreed  with  Mac- 
Andrews  &  Forbes  not  to  produce  licorice  for  tobacco 
manufacturers.  In  1906  all  the  stock  in  the  J.  S.  Young 
Company  ($1,800,000),  which  had  been  organized  to  take 
over  the  business  of  the  J.  S.  Young  Co.,  of  Baltimore,  Md., 
was  acquired  by  the  MacAndrews  &  Forbes  Co.  The  Mac- 
Andrews  &  Forbes  Co.,  use  in  excess  of  95  per  cent  of  the 
licorice  root  consumed  in  the  United  States. 

"  5.  American  Stogie  Company: 

In  May,  1903,  the  American  Cigar  Company  and  the 
American  and  Continental  Tobacco  Companies  caused  the 
American  Stogie  Company  to  be  incorporated 
Stogie  Co.  is  ^^  ^^^  Jersey,  with  $11,979,000  capital,  which 
formed  to  immediately  took  over  the  stogie  and  tobie 
take  over  the  business  of  the  companies  named  in  exchange 
tobie  for   $8,206,275   stock   and   then   in   the   usual 

business,  ways  acquired  the  business  of  others  in  the 
(1903).  manufacture,    sale    and    distribution    of    such 

products,  with  covenants  not  to  compete.  It  acquired  in 
exchange  for  $3,647,725  stock  all  shares  of  United  States 
Cigar  Company  (which  had  previously  acquired  and  owned 
the  business  of  important  competitors)  and  subsequently 
took  the  conveyance  of  the  plant  and  assets.  The  majority 
shares  always  have  been  held  by  defendant,  the  American 
Cigar  Company. 

"  As  we  think  the  legitimate  inferences  deducible  from 
the  undisputed  facts  which  we  have  thus  stated  will  be 
_  sufficient   to   dispose   of   the   controversy,   we 

retail  <io  not  deem  it  necessary  to  expand  this  state- 

tobacco  ment  so  as  to  cause  it  to  embrace  a  recital  of 

business  by  ^f  ^j-^    undisputed  facts  concerning  the  entry  of 
acquiring  .'  ".  '' 
the  United  the  American    1  obaccO  Company  into  the  re- 
Cigar  tail  tobacco  trade  through  the  acquisition  of 
ores  Co.  ^  controlling  interest  in  the  stock  of  what  is 


A  MONOPOLISTIC   CONTROL   COMPANY      397 

known  as  the  United  Cigar  Stores  Company,  as  well  as  to 
some  other  subjects  which  for  the  sake  of  brevity  w^e  like- 
wise pass  over,  in  order  to  come  at  once  to  a  statement 
concerning  the  foreign  companies. 


"  The  English  Companies: 

In  September,  1901,  the  American  Tobacco  Co.,  pur- 
chased for  $5,347,000  a  Liverpool  (Eng.)  corporation, 
Enters  th  known  as  Ogden's  Limited,  there  engaged  in 
English  manufacturing  and  distributing  tobacco  prod- 

market,  ucts.     A  trade  conflict  which  at  once  ensued 

^^^°^-^'  caused  many  of  the  English  manufacturers  to 

combine  into  an  incorporation  known  as  the  Imperial 
Tobacco  Company  of  Great  Britian  and  Ireland,  capital 
15,000,000,  afterwards  increased  to  18,000,000,  pounds 
sterling.  The  trade  war  was  continued  between  this  cor- 
poration and  the  American  Tobacco  Company,  with  a 
result  substantially  identical  with  that  which  had  hitherto, 
as  we  have  seen,  arisen  from  such  a  situation. 

"  In  September,  1902,  the  Imperial  and  the  American 
companies  entered  into  contracts  (executed  in  England) 
.  stipulating  that  the  former  should  limit  its 
agreements  business  to  the  United  Kingdom,  except  pur- 
with  English  chasing  leaf  in  the  United  States  (it  buys 
Seethe  ^°  54.000,000  pounds  annually)  ;  that  the  Ameri- 
world's  can  companies  should  limit  their  business  to 

market.  The  the  United  States,  its  dependencies  and  Cuba; 
Amedc'an  ^"^  ^^^^^  ^^^^  British-American  Tobacco  Com- 
Tobacco  Co.  pany,  with  capital  of  6,000,000  pounds  sterling 
is  formed,  apportioned  between  them,  should  be  or- 
ganized, take  over  the  export  business  of  both, 
and  operate  in  other  countries,  etc.  This  arrangement  was 
immediately  put  into  effect  and  has  been  observed. 

"  The  Imperial  Company  holds  one-third  and  the  Ameri- 
can Company  two-thirds  of  the  capital  stock  of  the  British- 
American  Tobacco  Company,  Limited.  The  latter  com- 
pany maintains  a  branch  office  in  New  York  City  and  the 


398  COMBINATION    ORGANIZATIONS 

vice-president  of  the  American  Tobacco  Company  is  a 
principal  officer.  This  company  uses  large  quantities  of 
domestic  leaf,  partly  exported  to  various  plants  abroad  and 
about  half  manufactured  here  and  then  exported.  By 
agreement,  all  this  is  purchased  through  the  American 
Tobacco  Company.  In  addition  to  many  plants  abroad  it 
has  warehouses  in  various  states  and  plants  at  Petersburg, 
Va.,  and  Durham,  N.  C,  where  tobacco  is  manufactured 
and  then  exported. 

"  The  purchase  of  necessary  leaf  tobacco  in  the  United 
States  by  the  Imperial  Company  is  now  made  through  a 
resident  general  agent  and  is  exported  as  a  part  of  foreign 
commerce. 

"  Not  to  break  the  continuity  of  the  narrative  of  facts 
we  have  omitted  in  the  proper  chronological  order  to 
state  the  facts  relative  to  what  was  known  as  the  Consoli- 
dated Tobacco  Company.  We  now  particularly  refer  to 
that  subject. 

"  The  Consolidated  Tobarco  Co.: 

In  June,  1901,  parties  largely  interested  in  the  American 
and  Continental  companies  caused  the  incorporation  in 
New  Jersey  of  the  Consolidated  Tobacco  Com- 
Consolidated  pany,  capital  $30,000,000  (afterwards  $40,- 
Tobacco  Co.  000,000),  with  broad  powers  and  perpetual  ex- 
to  "centralize  istence;  to  do  business  throughout  the  world, 
control,  and  to  guarantee  securities  of  other  companies, 

(1901).  etc.    A  majority  of  shares  was  taken  by  a  few 

individuals  connected  with  the  old  concerns:  A.  N.  Brady, 
F.  B.  Duke,  A.  H.  Payne,  Thomas  Ryan,  W.  C.  Whitney, 
and  P.  A.  B.  Widener.  J.  B.  Duke,  president  of  both  the 
old  companies,  became  president  of  the  Consolidated. 
Largely  in  exchange  for  bonds  the  new  company  acquired 
substantially  all  the  shares  of  common  stock  of  the  old 
ones.  Its  business,  of  holding  and  financing,  was  continued 
until  1904,  when  with  the  American  and  Continental  Com- 
panies, it  was  merged  into  the  present  American  Tobacco 
Company. 


A  MONOPOLISTIC   CONTROL  COMPANY      399 

"  By  proceedings  in  New  Jersey,  October,  1904,  the  (old) 
ipjjg  American     Tobacco     Company,     Continental 

Consolidated,  Tobacco  Company,  and  Consolidated  Tobacco 
P^^  j.-  ^  Company,  were  merged  into  one  corporation, 
and  the  old  under  the  name  of  The  American  Tobacco 
Am.  Tob.  Co.  Company,  the  principal  defendant  here.  The 
fnt  "l^^^^^  merged  company,  with  perpetual  existence, 
An?.  Tobacw  was  capitalized  at  $180,000,000  ($80,000,000 
Co.,  (1904).    preferred,  ordinarily  without  power  to  vote). 

"  The  powers  conferred  by  the  charter  are  stated  in  the 
margin.*' 

"  Prior  to  the  merger  the  Consolidated  Tobacco  Com- 
pany, a  majority  of  whose  $40,000,000  share  capital  was 
held  by  J.  B.  Duke,  Thomas  F.  Ryan,  William  C.  Whitney, 
Antony  N.  Brady,  Peter  A.  B.  Widener  and  Oliver  H. 
Payne,  had  acquired,  as  already  stated,  nearly  all  common 
shares  of  both  old  American  and  Continental  companies, 
and  thereby  control.  The  preferred  shares,  however,  were 
held  by  many  individuals.  Through  the  method  of  distri- 
bution of  the  stock  of  the  new  company,  in  exchange  for 
shares  in  the  old  American  and  in  the  Continental  Com- 
pany it  resulted  that  the  same  six  men  in  control  of  the 
combination  through  the  Consolidated  Tobacco  Company 
continued  that  control  by  ownership  of  stock  in  the  merged 
or  new  American  Tobacco  Company.     The  assets,  property, 

6  To  buy,  manufacture,  sell  and  otherwise  deal  in  tobacco  and  the 

products   of   tobacco   in   any   and   all    forms;    to   guarantee 

dividends  on  any  shares  of  the  capital  stock  of  any  corporation  in 
which    said    merged    corporation    has    an    interest    as    stockholder; 

to  carry  on  any  business  operations  deemed  by  such  merged 

corporation  to  be  necessary  or  advisable  in  connection  with  any 
of  the  objects  of  its  incorporation  or  in  furtherance  of  any  there- 
of, or  tending  to  increase  the  value  of  its  property  or  stock;   

to  conduct  business  in  all  other  States,  territories,  possessions  and 
dependencies  of  the  United  States  of  America,  and  in  all  foreign 

countries;   to   purchase   or  otherwise  acquire  and  hold,   sell, 

assign,  transfer,  mortgage,  pledge,  or  otherwise  dispose  of  the 
shares  of  the  capital  stock  or  of  any  bonds,  securities,  or  other 
evidence  of  indebtedness  created  by  any  other  corporation  or  corpo- 
rations of  this  or  any  other  State  or  government,  and  to  issue  its 
own  obligations  in  payment  or  exchange  therefor 


400  COMBINATION    ORGANIZATIONS 

etc.,  of  the  old  companies  passed  to  the  American  Tobacco 
Company  (merged),  which  has  since  carried  on  the 
business. 

"  The  record  indisputably  discloses  that  after  this  merger 
the  same  methods  which  were  used  from  the  beginning  con- 
tinued to  be  employed.  Thus,  it  is  beyond  dispute:  First, 
that  since  the  organization  of  the  new  American  Tobacco 
Company  that  company  has  acquired  four  large  tobacco 
concerns,  that  restrictive  covenants  against  engaging  in  the 
tobacco  business  were  taken  from  the  sellers,  and  that  the 
plants  were  not  continued  in  operation  but  were  at  once 
abandoned.  Second,  that  the  new  company  has  besides 
acquired  control  of  eight  additional  concerns,  the  business 
of  such  concerns  being  now  carried  on  by  four  separate 
corporations,  all  absolutely  controlled  by  the  American 
Tobacco  Company,  although  the  connection  as  to  two  of 
these  Companies  with  that  corporation  was  long  and  per- 
sistently denied. 

***** 

"  Thus  reaching  the  end  of  the  second  period  and  coming 
to  the  time  of  the  bringing  of  the  suit,  brevity  prevents  us 
from  stopping  to  portray  the  difference  between  the  con- 
dition in  1890  when  the  (old)  American  Tobacco  Company 
was  organized  by  the  consolidation  of  five  competing 
cigarette  concerns  and  that  which  existed  at  the  commence- 
ment of  the  suit-  That  situation  and  the  vast  power  which 
the  principal  and  accessory  corporate  defendants  and  the 
small  number  of  individuals  who  own  a  majority  of  the 
common  stock  of  the  new  American  Tobacco  Company 
exert  over  the  marketing  of  tobacco  as  a  raw  product,  its 
manufacture,  its  marketing  when  manufactured  and  its 
consequent  movement  in  the  channels  of  interstate  com- 
merce indeed  relatively  over  foreign  commerce  and  the 
commerce  of  the  whole  world,  in  the  raw  and  manufactured 
products  stand  out  in  such  bold  relief  from  the  undisputed 
facts  which  have  been  stated  as  to  lead  us  to  pass  at  once 
to  the  second  fundamental  proposition  which  we  are  re- 
quired to  consider.     That  is,  the  construction  of  the  Anti- 


A  MONOPOLISTIC   CONTROL   COMPANY      401 

Trust  Act  and  the  application  of  the  act  as  rightly  con- 
strued to  the  situation  as  proven  in  consequence  of  having 


determined  the  ultimate  and  final  inferences  properly  de- 
ducible  from  the  undisputed  facts  which  we  have  stated." 


402  COMBINATION    ORGANIZATIONS 

"  Considering  then  the  undisputed  facts  which  we  have 
previously  stated,  it  remains  only  to  determine  whether 
they  establish  that  the  acts,  contracts,  agree- 
Sup^eme         ments,  combinations,  etc.,  which  were  assailed 
Court  were  of  such  an  unusual  and  wrongful  char- 

ordered  the  acter  as  to  bring  them  within  the  prohibitions 
o}^the"*^^°'^  of  the  law.  That  they  were,  in  our  opinion, 
tobacco  so  overwhelmingly  results  from  the  undisputed 

combine.  ^^^^g  ^^lat  it  seems  only  necessary  to  refer  to 
the  facts  as  we  have  stated  them  to  demonstrate  the 
correctness  of  this  conclusion.  Indeed,  the  history  of  the 
combination  is  so  replete  with  the  doing  of  acts  which  it 
was  the  obvious  purpose  of  the  statute  to  forbid,  so  demon- 
strative of  the  existence  from  the  beginning  of  a  purpose 
to  acquire  dominion  and  control  of  the  tobacco  trade,  not 
by  the  mere  exertion  of  the  ordinary  right  to  contract  and 
to  trade,  but  by  methods  devised  in  order  to  monopolize 
the  trade  by  driving  competitors  out  of  business,  which 
were  ruthlessly  carried  out  upon  the  assumption  that  to 
work  upon  the  fears  or  play  upon  the  cupidity  of  com- 
petitors w^ould  make  success  possible.  We  say  these  con- 
clusions are  inevitable,  not  because  of  the  vast  amount 
of  property  aggregated  by  the  combination,  not  because 
alone  of  the  many  corporations  which  the  proof  shows  were 
united  by  resort  to  one  device  or  another.  Again,  not  alone 
because  of  the  dominion  and  control  over  the  tobacco  trade 
which  actually  exists,  but  because  we  think  the  conclusion 
of  wrongful  purpose  and  illegal  combination  is  overwhelm- 
ingly established  by  the  following  considerations: 

"  (a)  By  the  fact  that  the  very  first  organization  or 
combination  was  impelled  by  a  previously  existing  fierce 
trade  war,  evidently  inspired  by  one  or  more  of  the  minds 
which  brought  about  and  became  parties  to  that 
combination. 

"  ib)  Because,' immediately  after  that  combination  and 
the  increase  of  capital  which  followed,  the  acts  which  en- 
sued justify  the  inference  that  the  intention  existed  to  use 
the   power   of   the   combination   as   a   vantage   ground  to 


A  MONOPOLISTIC   CONTROL   COMPANY      403 

further  monopolize  the  trade  in  tobacco  by  means  of  trade 
conflicts  designed  to  injure  others,  either  by  driving  com- 
petitors out  of  business  or  compelling  them  to  become 
parties  to  a  combination  —  a  purpose  whose  execution  was 
illustrated  by  the  plug  war  which  ensued  and  its  results, 
by  the  snuff  war  which  followed  and  its  results,  and  by  the 
conflict  which  immediately  followed  the  entry  of  the  com- 
bination in  England  and  the  division  of  the  world's  business 
by  the  two  foreign  contracts  which  ensued. 

"  (c)  By  the  ever-present  manifestation  which  is  ex- 
hibited of  a  conscious  wrong-doing  by  the  firm  in  which 
the  various  transactions  were  embodied  from  the  beginning, 
ever  changing  but  ever  in  substance  the  same.  Now  the 
organization  of  a  new  company,  now  the  control  exerted 
by  the  taking  of  stock  in  one  or  another  or  in  several,  so 
as  to  obscure  the  result  actually  attained,  nevertheless 
uniform,  in  their  manifestations  of  the  purpose  to  restrain 
others  and  to  monopolize  and  retain  power  in  the  hands 
of  the  few  who  it  would  seem,  from  the  beginning  con- 
templated the  mastery  of  the  trade  which  practically 
followed. 

"  (d)  By  the  gradual  absorption  of  control  over  all  the 
elements  essential  to  the  successful  manufacture  of  tobacco 
products,  and  placing  such  control  in  the  hands  of  seem- 
ingly independent  corporations  serving  as  perpetual  bar- 
riers to  the  entry  of  others  into  the  tobacco  trade. 

"  (e)  By  persistent  expenditure  or  millions  upon  millions 
of  dollars  in  buying  out  plants,  not  for  the  purpose  of  uti- 
lizing them,  but  in  order  to  close  them  up  and  render  them 
useless  for  the  purposes  of  trade. 

"  (/)  By  constantly  recurring  stipulations,  whose  le- 
gality, isolatedly  viewed,  we  are  not  considering,  by  which 
numbers  of  persons,  whether  manufacturers,  stockholders 
or  employees,  were  required  to  bind  themselves,  generally 
for  long  periods,  not  to  compete  in  the  future.  Indeed, 
when  the  results  of  the  undisputed  proof  which  we  have 
stated  are  fully  apprehended,  and  the  wrongful  acts  which 
they  exhibit  are  considered,  there  comes  inevitably  to  the 
mind  the  conviction  that  it  was  the  danger  which  it  was 


404  COMBINATION    ORGANIZATIONS 

deemed  would  arise  to  individual  liberty  and  the  public 
well-being  from  acts  like  those  which  this  record  exhibits, 
which  led  the  legislative  mind  to  conceive  and  to  enact 
the  Anti-Trust  Act,  considerations  which  only  serve  to 
clearly  demonstrate  that  the  combination  here  assailed  is 
within  the  law  as  to  leave  no  doubt  that  it  is  our  plain  duty 
to  apply  its  prohibitions." 


PART   V 

ABUSES   OF   OWNERSHIP   ORGANIZATION 
AND   ATTEMPTS   TO   REMEDY   THEM 


CHAPTER  XX 

ABUSES  AND  WEAKNESSES   OF   THE   AMERICAN   SYSTEM 

During  the  past  three  decades  many  hiws  have  been 
enacted  by  congress  and  the  state  legislatures  that  place 
restrictions  upon  the  freedom  of  action  of  business  owner- 
ship organizations.  The  state  of  Ohio  was  one  of  the  first 
to  enter  the  lists  against  big  business  when  it  brought  suit 
against  the  Standard  Oil  Company  of  Ohio,  to  force  dis- 
solution of  the  Standard  Oil  Trust,  of  1882.  Within  a  com- 
paratively short  time  other  states  followed  this  lead  by 
enacting  anti-trust  legislation,  and  even  the  federal  con- 
gress was  prevailed  upon  to  pass  the  Sherman  Anti-Trust 
Act.  From  then  on  there  has  been  a  continual  fight  raging 
in  our  legislative  bodies  to  correct  abuses  and  to  combat 
evils  that  have  crept  into  the  ownership  organization.  At 
times  this  has  taken  the  form  of  investigations  by  com- 
mittees and  bureaus  whose  reports  have  been  highly  en- 
lightening. Among  them  we  find  the  1900  report  of  the 
United  States  Industrial  Commission,  consisting  of  some 
19  volumes;  that  of  the  Hughes'  Commission  of  the  state 
of  New  York  which  laid  bare  the  connections  of  the  great 
insurance  companies  with  big  business  in  the  matter  of 
finance  and  control;  the  voluminous  reports  of  the  Pujo 
Commission  concerning  the  so-called  "  Money  Trust  ";  the 
many  reports  of  the  United  States  Bureau  of  Corporations, 
and  more  recently  those  of  the  Federal  Trade  Commission. 
Prosecutions  have  also  been  numerous  both  in  the  state 
and  the  federal  courts.  Their  reports  are  filled  with  de- 
cisions condemning  in  no  doubtful  way  certain  methods 

407 


408         OWNERSHIP    ORGANIZATION    ABUSES 

and  practices  that  have  been  employed  by  our  large  and 
small  business  organizations. 

These  events  and  acts  permit  of  but  one  interpretation, 
namely,  that  there  is  something  wrong  in  our  system  of 
ownership  organization.  It  does  not  conform  in  full  to 
our  sense  of  business  ethics  and  morals.  It  is  experiencing 
difficulty  in  adjusting  a  new  order  of  organization  to  our 
ideas  of  propriety  as  dictated  by  our  laws  and  customs. 
Consequently  there  is  ever  a  tendency  to  violate  the  exist- 
ing laws.  Big  business  units  have  been  perhaps  somewhat 
more  culpable  in  this  than  have  the  smaller  ones.  The 
former  through  their  control  of  our  basic  industries  exer- 
cise a  potent  influence  upon  our  daily  lives  and  upon  busi- 
ness in  general.  They  are  constantly  in  the  public  eye. 
The  errors  that  they  commit  are  seized  upon  by  the  pub- 
licist and  are  prominently  displayed  in  newspapers  and 
periodicals.  For  that  reason,  but  not  without  some  justi- 
fication, has  the  general  public  come  to  view  our  big 
business  organizations  from  a  critical  angle. 

What  then,  are  some  of  the  acts  and  abuses  that  have 
called  forth  this  deluge  of  criticism? 

Acts   and   Abuses   Leading   to   Criticism 

Generally  speaking,  the  criticism  directed  against  the 
ownership  organization  centers  upon  six  things,  namely: 
(1)  The  methods  of  administration  and  control;  (2)  the 
methods  and  practices  of  promotion  and  finance;  (3)  finan- 
cial management;  (4)  speculation;  (5)  unfair  methods  of 
competition;  and  (6)  monopolies  and  combinations  in  re- 
straint of  trade. 

1.  Administrative  Abuses.  —  From  the  standpoint  of 
administration  and  control  business  has  laid  itself  open 
to  criticism,  not  so  much  because  of  the  direct  violations  of 
law,  but  rather  because  the  law  has  been  so  lax  that  it  has 
permitted  pernicious  practices  and  abuses  to  spring  up  and 


ABUSES    AND    WEAKNESSES  409 

has  countenanced  and  tolerated  them  until  public  opinion 
has  revolted.  While  there  are  many  of  these  laxities  of 
law,  a  few  have  stood  out  more  prominently  than  others. 
Since  most  of  them  have  been  pointed  out  here  and  there 
in  the  preceding  chapters  it  will  suffice  at  this  point  merely 
to  bring  them  together  in  the  form  of  a  summary. 

(a)  The  ease  with  which  stock  may  be  transferred  has 
made  it  possible  for  the  criminally  inclined  manipulator  to 
organize  a  company  which  he  knows  to  be  unsound,  to  re- 
serve for  himself  a  large  block  of  the  stock  and  to  dispose 
of  his  interest  at  a  good  profit  when  the  propitious  moment 
arrives.  In  this  way  those  who  have  organized  the  com- 
pany, and  upon  whom  the  responsibility  for  its  conduct 
should  rest,  are  enabled  to  slip  out  before  the  collapse 
comes. 

(6)  The  small  holdings  required  of  directors  have  also 
caused  criticism.  Through  dummy,  or  controlled  directors 
a  small  group  of  stockholders  may  retain  control  over  the 
affairs  of  a  large  corporation.  They  can  then  cause  it  to 
be  managed  for  their  own  personal  profit  to  the  detriment 
of  the  whole  body  of  stockholders.  There  may  be  some 
advantage  in  this  in  so  far  as  it  will  permit  of  greater  free- 
dom in  hiring  executive  and  administrative  ability.  It  is, 
nevertheless,  objectionable  because  the  laws  in  most  states 
are  not  such  as  to  hold  the  directors  both  civilly  and  crim- 
inally responsible  for  their  acts.  The  remedy,  then,  does 
not  appear  to  be  in  the  direction  of  more  stringent  require- 
ments as  to  qualifications  of  directors.  They  must  be 
made  responsible  to  stockholders  and  creditors  for  their 
acts. 

(c)  The  inadequate  representation  of  minorities  is  an- 
other point  upon  which  criticism  centers.  Under  the  ordi- 
nary system  of  voting  those  who  can  secure  by  ownership 
or  proxy  the  right  to  vote  51  per  cent  of  the  voting  stock 
have  the  right  to  fill  all  places  on  the  board  of  directors. 


410         OWNERSHIP    ORGANIZATION    ABUSES 

They  may  in  this  way  exclude  the  minority  from  voicing 
its  opinion  or  being  represented  on  the  board  of  control. 
Such  a  condition  has  frequently  led  to  factional  fights 
among  the  stockliolders  which  have  been  carried  to  the 
highest  courts.  Often  enough,  in  such  cases,  has  the 
minority  been  sustained  in  its  claim  of  mismanagement. 
The  best  remedy  is  to  assure  the  minority  of  adequate 
proportional  representation.  To  this  end  many  states  have 
adopted  legislation  which  in  some  cases  prescribes,  and  in 
others  permits  of,  the  use  of  the  cumulative  method  of 
voting.  Other  states,  however,  have  let  this  abuse  go  un- 
checked by  remedial  laws.  Under  this  condition  the  incor- 
porators may  choose  the  practice  that  is  to  prevail. 

{d)  The  privilege  of  proxy  has  also  been  abused. 
Strong,  well-organized  minorities  owning  from  25  to  30  per 
cent  of  the  voting  stock  have  found  it  easy  to  maintain 
themselves  in  control  of  the  corporation  for  long  periods 
of  years  through  the  use  of  long-time  proxies.  Here  also, 
several  states  have  taken  action  limiting  the  life  of  a  proxy 
to  a  single  election,  but  they  are  very  few  in  number. 

(e)  The  large  number  of  stockholders  and  their  remote- 
ness from  the  seat  of  activity  of  the  enterprise  in  which 
they  are  interested  is  another  contributing  influence.  The 
tens  of  thousands  of  stockholders  of  our  larger  corporations 
are  scattered  throughout  the  forty-eight  states  and  many 
foreign  countries.  It  is  impossible  for  them  to  come  to- 
gether at  stated  intervals  to  discuss  the  affairs  of  the  busi- 
nesses. Many  of  them  have  no  interest  in  the  manage- 
ment and  do  not  care  to  assume  the  burden  of  active 
participation  in  the  corporate  affairs.  Many  of  them  hold 
the  stock  for  speculative  purposes  solely,  expecting  to  make 
a  profit,  not  from  dividends,  but  from  a  resale  of  the  stock. 
Others,  while  they  are  bona-fide  investors  who  hold  stock 
for  the  sake  of  dividends,  are  perfectly  content  to  let  those 
who  have  the  power  control  the  policies  of  the  corporation 


ABUSES    AND    WEAKNESSES  411 

and  give  their  proxies  freely  or  abstain  entirely  from  vot- 
ing. These  circumstances  frequently  lead  to  abuses  per- 
petrated by  a  small,  well-organized  group  of  stockholders, 
whereby  such  a  group  seeks  gain,  irrespective  of  the  effect 
of  their  acts  upon  the  great  body  of  more  or  less 
disinterested  stockholders. 

(/)  Furthermore,  in  most  of  the  states  there  are  no 
definite  responsibilities  placed  upon  officers  and  directors. 
In  but  a  very  few  are  they  made  both  civilly  and  crimi- 
nally liable  for  infractions  of  the  law.  And  even  where 
there  are  such  laws,  the  lack  of  interest,  coupled  with  an 
amazing  ignorance  of  their  lawful  rights  on  the  part  of  the 
stockholders,  permits  the  criminally  inclined  to  defraud 
them  without  being  brought  to  justice  for  their  misdeeds. 

2.  Abuses  Arising  out  of  Methods  of  Promoting  and 
Financing  Companies.  —  The  manner  in  which  most  of 
our  larger  business  companies  have  been  promoted  and 
financed  has  been,  and  still  is,  the  cause  of  much  justifiable 
criticism.  Legislatures  have  erected  few,  if  any,  safe- 
guards against  the  wild  extravagance  and  unsound  prac- 
tices that  have  characterized  this  feature  of  the  formation 
and  operation  of  our  corporations  in  general.  Many  of 
them,  organized  since  1890,  have  been  highly  speculative 
ventures  that,  from  the  beginning,  had  little  chance  of 
success.  They  floundered  along  for  a  few  brief  years, 
attempting  through  speculation  and  other  questionable 
practices  to  maintain  themselves,  only  in  the  end  to  be  re- 
organized or  to  become  bankrupts  and  to  disappear.  Un- 
wise promotion,  poor,  and  sometimes  even  fraudulent, 
financing  and  orgies  of  speculation  have  marked  their 
lives.  Many  of  these  abuses  have  been  brought  to  light 
through  the  reports  of  government  bureaus,  special  inves- 
tigation committees,  court  proceedings  and  accounts  car- 
ried in  financial  publications.  It  is  quite  out  of  the  ques- 
tion to  treat  them  in  full  in  this  work,  for  they  are  the 


412         OWNERSHIP    ORGANIZATION    ABUSES 

proper  subject  matter  for  a  treatise  on  corporation  finance. 
Nevertheless,  they  have  functioned  so  prominently  in  the 
development  of  the  modern  ownership  organization  in  the 
United  States  that  they  can  not  be  passed  by  without  a 
word  or  two  of  explanation. 

(a)  Unwise  promotion.  As  has  already  been  explained, 
the  work  of  promotion  consists  essentially  of  securing 
options  on  the  properties  to  be  acquired  by  the  proposed 
new  business,  of  making  provisions  for  financing  and  under- 
writing the  issues  of  securities,  of  organizing  the  new  com- 
pany under  an  appropriate  charter,  of  selling  the  optioned 
properties  to  the  company  and  lastly,  of  inducing  the 
public  to  buy  the  securities  from  the  underwriters.  This 
process  frequently  has  been  accompanied  by  an  extravagant 
use  of  capitalization,  huge  profits  for  the  promoters  and 
underwriters  and  heavy  losses  for  the  investors. 

The  method  is  admirably  summarized  by  Professor  A. 
S.  Dewing,  in  a  study  of  the  promotions  and  reorganiza- 
tions of  some  eighteen  large  companies  in  the  following 
words:  ^  "The  tangible  assets  averaged  40%  of  the  total 
issued  securities.  The  remaining  60%,  representing 
usually  the  overlying  stocks,  was  distributed  among  five 
separable  interests,  although  in  the  majority  of  cases  one 
or  more  were  merged.  These  five  interests  were  (1)  the 
promoter  who  secured  the  options,  (2)  the  banker  who 
stood  god-father  for  the  enterprise  or  underwrote  its  securi- 
ties, (3)  the  manufacturers  who  received  a  price  for  their 
plants  in  excess  of  their  value,  (4)  the  public  who  received 
a  bonus  of  common  stock  for  purchasing  the  securities  of 
the  enterprise,  (5)  the  attorneys  and  others  who  did  the 
work  of  incorporating  the  consolidation.  Looking  at  the 
matter  still  in  terms  of  a  typical  promotion,  it  would  ap- 
pear that  of  the  60%  in  securities  above  the  value  of  the 

1  A.  S.  Dewing,  Corporate  Promotions  and  Reorganizations. 
Pp.  540-541. 


ABUSES    AND    WEAKNESSES  413 

property,  10%  went  to  the  promoter  for  his  service,  10% 
to  the  banker  for  his  services,  20%  to  the  manufacturers 
as  a  gift  in  excess  of  the  value  paid  for  their  plants,  15% 
to  the  public  as  '  bait '  to  induce  the  purchase  of  the  securi- 
ties and  5%  for  the  direct  labor  incident  to  incorporation. 
Such  figures  represent  the  roughest  approximation.  They 
are  susceptible  to  infinite  variations  according  to  the  pro- 
portions of  the  bonds  and  stocks,  to  the  period  of  promo- 
tion, to  the  kind  of  industry,  to  the  prevailing  sentiment 
of  the  public.  As  rough  approximations,  however,  they 
are  believed  to  be  fair  statements  of  average  conditions." 

(6)  Over-Capitalization.  In  most  of  the  cases  described 
by  Dewing,  practically  all  of  the  common  stock  was 
"  water  "  and  on  the  average  the  actual  value  of  the  prop- 
erty acquired  by  these  companies  did  not  exceed  the  par 
value  of  the  preferred  stock  issued  against  it.  As  a  result, 
tens  of  millions  of  dollars  in  worthless  stocks  were  foisted 
off  upon  the  public.  In  very  few  instances,  indeed,  did 
the  new  large  scale  business  enterprise  grow  rapidly  enough 
to  fill  out  the  financial  clothes  that  had  so  generously  been 
supplied  to  it  by  the  promoter  and  the  underwriting 
syndicate. 

The  responsibility  for  this  state  of  affairs  rests  by  no 
means  upon  the  promoter  alone.  These  great  enterprises 
could  not  have  been  built  up  without  the  support  and 
assistance  of  financiers  who  could  furnish  the  necessary 
funds  within  the  short  period  of  time  required.  The 
assembling  of  funds  was  a  joint  enterprise  in  which  a  large 
number  of  financiers  had  to  participate.  The  large  profit 
resulting  from  a  successful  underwriting  venture  was  worth 
the  risk  of  loss.  But  the  chance  for  success  was  better 
if  a  large  number  of  banking  houses  could  be  brought  into 
the  syndicate.  There  remained  then  less  to  criticise.  Once 
having  participated  in  a  syndicate  the  smaller  banking 
houses  in  provincial  districts  were  obliged  thereafter  to 


414         OWNERSHIP    ORGANIZATION    ABUSES 

accept  any  and  all  offers  to  become  syndicate  members 
and  to  subscribe  to  the  securities  of  good  or  bad  concerns 
without  distinction.  For,  if  they  objected  to  the  bad  pro- 
motions, they  were  denied  a  share  in  the  good  ones. 

(c)  Influence  of  Life  Insurance  Companies.  Up  to  1906, 
the  peculiar  situation  of  the  life  insurance  companies  also 
played  an  important  part  in  the  matter  of  promotions. 
In  the  first  place,  little  short  of  a  monopoly  in  the  writing 
of  life  insurance  had  come  into  the  hands  of  the  Equitable, 
the  New  York  Life  and  the  Mutual  companies.  They  were 
receiving  money  faster  than  they  could  invest  it.  At  times 
the  Equitable  alone  had  from  30  to  40  million  dollars  in 
cash  lying  uninvested  in  New  York  banks.  This  money 
was  borrowed  by  the  banking  syndicates  for  temporary 
use  in  underwriting.  Some  of  the  life  insurance  companies 
even  engaged  directly  in  this  work  under  assumed  names. 
The  New  York  Life  Insurance  Company,  for  example,  did 
so  under  the  name  "  Milik."  With  all,  they  furnished 
the  syndicates  with  a  ready  market  for  their  securities 
and  by  1904  the  three  companies  mentioned  above  had 
invested  in  stocks  and  bonds  whose  aggragate  par  value 
was  in  excess  of  one  billion  dollars.^  The  result  was  to 
force  the  insurance  companies  to  join  the  bankers  in  specu- 
lative manipulation  of  the  market. 

{d)  Supporting  the  Market.  The  promotion  is  not  a 
success  from  the  underwriters'  standpoint  unless  the  securi- 
ties can  be  sold  at  a  profit  to  the  public.  In  order 
to  facilitate  their  sale,  the  price  of  the  securities  must  be 
kept  up.  For  this  purpose  the  services  of  a  large  number 
of  experts  were  employed  to  manipulate  the  Stock  Ex- 
change. They  call  it  "  supporting  the  market."  The  stock 
must  be  sold  at  a  price  agreed  upon  as  a  minimum  by  the 
syndicate.     If  it  then  appears  on  the  market  at  less  than 

2  Reports  of  the  committee  of  the  New  York  Legislature.     New 
York   Life   Insurance   Investigation,    1906. 


ABUSES    AND    WEAKNESSES  415 

this  amount,  it  must  be  bought  up.  In  this  way  they  work 
off  their  securities  and  gently  inject  them  into  circulation. 
The  practice  is  also  known  as  making  "  wash  sales." 

Thus,  in  the  reports  of  the  Pujo  Commission,  the  number 
of  shares  bought  and  sold  by  the  syndicate  in  the  promotion 
of  the  California  Patents  Company  are  shown  as  follows: 


Bought 

Sold 

October    5 

6,000 

11,200 

7 

8,900 

4,000 

10 

13,000 

17,000 

22 

6,400 

10.900 

24,300  43,100 

As  a  result  of  these  wash  sales,  the  net  sales  were  not 
43,100  shares,  but  only  18,800  shares. 

(e)  Profits  of  Underwriting.  A  great  deal  of  criticism 
has  also  been  directed  against  the  profits  of  the  under- 
writers. Their  profits,  to  be  sure,  have  been  large  at  times. 
Yet,  they  are  highly  problematical,  for  they  are  in  part  a 
payment  for  the  assumption  of  an  extraordinary  risk,  and 
not  all  underwriting  ventures  prove  to  be  successful. 

In  the  case  of  the  United  States  Steel  Corporation  the 
underwriters  received  a  bonus  of  $25,000,000  in  stock  and 
their  total  profit  may  have  been  two  or  three  times  as  great. 
The  bankers  who  financed  the  United  States  Rubber  Com- 
pany are  reported  to  have  received  from  the  company  for 
each  $100  in  cash  one  share  of  preferred  and  one  share  of 
common  stock,  each  of  the  par  value  of  $100.  The  pre- 
ferred stock  they  sold  at  $92  per  share  and  the  common 
at  $29.25  per  share.  This  gave  them  a  return  of  $121.25 
for  every  $100  in  cash  turned  over  to  the  company.^  In 
the  case  of  the  American  Smelting  and  Refining  Company 
the  underwriters'  gross  profit  was  approximately  15  per 
cent.    These  are  not  extraordinary  cases;  and  they  seem 

^  Commercial  &  Financial  Chronicle,  Sept.  15,  1915. 


416         OWNERSHIP    ORGANIZATION    ABUSES 

to  indicate  that  the  profits  were  hirge  even  after  the 
expenses  had  been  deducted  from  the  gross  profit. 

However,  losses  have,  at  times,  also  been  large.  In 
financing  the  International  Pump  Company  the  under- 
writers suffered  a  net  loss  of  approximately  $20  out  of  each 
$100  in  cash  furnished.  And  in  the  promotion  of  the 
American  Malting  Company  their  losses  probably  exceeded 
$70  out  of  the  hundred. 

(/)  Promoters'  Profits.  Much  has  been  said  on  the  sub- 
ject of  promoters'  profits,  particularly  by  Professor 
Dewing.*  Their  profits  come  in  the  main  from  two 
sources.  In  the  first  place,  there  is  the  legitimate  profit 
derived  from  the  sale  of  the  securities  that  the  promoter 
receives  as  his  commission,  which  may  amount  to  10  per 
cent  of  the  stock  issued.  In  the  second  place,  there  is  the 
illegitimate  profit  arising  out  of  the  practice  of  "  milking 
the  corporation,"  namely,  the  purchase  of  plants,  etc.,  by 
the  promoter  and  their  resale  by  him  at  much  advanced 
prices  to  the  company  which  he  is  promoting.  The  latter 
practice  has  resulted  several  times  in  calling  upon  the 
courts  to  determine  what  constitutes  a  proper  profit.  As 
a  result  of  one  such  case,^  the  promoters  of  the  Old 
Dominion  Copper  Mining  &  Smelting  Company  were 
obliged  to  pay  $2,000,000  of  illegitimate  profits  to  the 
company.  In  both  Germany  and  England  steps  have  been 
taken  to  curb  this  practice  through  prescribed  and  other 
legal  requirements. 

3.  Abuses  in  Financial  Management.  —  The  financial 
management  of  the  company  following  its  promotion  is 
equally  as  important  to  the  general  public  and  the  security- 
holders, as  the  circumstances  surrounding  its  formation. 
Our  large  corporations  are  managed  cither  by  business 
men,  or  bankers,  or  both.     The  bankers  who  were  origi- 

*  A.  S.  Dewing,  Corporate  Promotiom  mid  Reorganizations. 
^  Journal  oj  Political  Economy,  1900,  p.  535. 


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CHART  SHOWING  THE  CU3SE  INTERRELATION 

EXISTING  BETWEEN  THE  RAILROAD, 

RAILROAD  EQUIPMENT  AND 

FINANCIAL  COMPANIES 

OF  THE  UNITED  STATES 

IN   1920 


The  original  of  this  chart,  together  with  others,  was  used  by  W.  Jett  Lauck,  economist 
for  tJie  Railroad  Brotherhoods  as  a  basis  lor  his  assertion  that  a  group  of  New  York  (inan- 
controlled  the  railroads  and  great  industrial  companies  of  the  United  States.  As 
originally  pubhshed  in  the  Congressional  Record  of  March  14,  1920,  in  illustration  of  an 
attack  on  the  Money  Trust  by  Senator  LaPollette,  it  shows  ten  additional  railroad  i 
panie8  that  have  here  been  omitted. 


ABUSES    AND    WEAKNESSES  417 

nally  called  upon  to  finance  the  company  during  the  period 
of  promotion  frequently  retain  control  over  it  and  direct 
its  operations  afterwards.  Indeed,  instances  are  not  lack- 
ing where  not  only  the  original  financing,  but  also  the  sub- 
sequent financial  management,  was  carried  on  primarily 
for  the  benefit  of  Wall  Street  and  to  the  detriment  of  the 
best  interests  of  the  business  itself.  This  appears  to  have 
been  largely  the  case  with  the  Rock  Island  Company, 
whose  failure  in  1915  is  generally  attributed  to  banker 
management.  On  the  other  hand,  where  these  great  busi- 
nesses remained  more  or  less  exclusively  in  the  hands  of 
business  men  they  soon  found  themselves  in  financial  straits. 
Large  business  enterprises  are  in  constant  need  of  financing 
for  purpose  of  development  and  to  enable  many  of  them 
to  create  a  market  for  their  products.  Hence,  they  must 
have  the  advice  and  assistance  of  the  bankers.  Ignorance 
of  banking  methods,  of  credits  and  of  financing  through 
the  substitution  of  securities  on  the  part  of  the  man- 
agement of  the  Westinghouse  Electric  and  Manu- 
facturing Company  was  largely  the  cause  of  its  fail- 
ure in  1907.  The  same  thing  was  true  of  the  old 
Claflin  Company. 

It  is  thus  seen  that  some  failures  have  been  attributable 
to  too  much  banker  management  and  others  to  too  little. 
It  is  hardly  necessary  to  point  out  that  there  is  a  happy 
medium.  Success  in  modern  business,  especially  where 
the  instrumentalities  of  organization  consist  of  securities, 
depends  to  an  extraordinary  degree  upon  a  sound  finan- 
cial policy  • —  a  policy  that  v\'ill  win  the  support  not  only 
of  the  banking  interests  but  also  of  the  investing 
public. 

Considered  in  this  light,  the  financial  policy  of  the 
United  States  Steel  Corporation,  exclusive  of  its  promotion, 
has  been  exceptionally  sound.  Handicapped  in  the  begin- 
ning by  heavy  over-capitalization  which  seriously  threat- 


418         OWNERSHIP    ORGANIZATION    ABUSES 

ened  its  existence,  it  has  gradually  overcome  its  difficulties 
and  is  today  probably  the  most  powerful  corporation  in 
existence.  Its  success  in  this  respect  is  in  no  small  degree 
attributable  to  a  combination  of  excellent  industrial  man- 
agerial ability  of  such  men  as  Schwab,  Corry  and  Farrell 
with  the  financial  acumen  of  Judge  Gary.  But  even  this 
great  corporation  found  it  necessary  to  indulge  in  financial 
manipulation  to  lessen  somewhat  the  burden  of  over- 
capitalization under  which  it  labored- 
Even  today,  the  management  of  most  of  our  great  business 
enterprises  conducted  under  the  corporate  form  of  organiza- 
tion is  still  too  much  in  the  hands  of  financiers  to  the 
exclusion  of  men  who  are  equipped  with  the  proper  tech- 
nical and  industrial  training.  This  is  particularly  true 
of  our  railway  and  railway  equipment  companies;  a 
fact  that  is  clearly  brought  out  by  the  accompany- 
ing chart. 

(a)  Financial  readjustments.  —  If  the  enterprise  is 
heavily  over-capitalized  it  must  sooner  or  later  effect  a  read- 
justment. Its  financial  clothes  are  too  large  for  it  and  it 
must  increase  its  assets  or  earning  power  to  fill  them,  or  the 
clothes  must  be  trimmed  down  to  fit  the  earning  power  of 
the  corporation.  The  latter  practice  seems  to  have  been 
the  more  common  in  this  country,  where  conversions  and 
reorganizations  have  been  frequent. 

The  principle  underlying  both  the  conversion  and  the 
reorganization  is  that  of  substituting  one  type  of  security 
for  another.  In  the  case  of  a  conversion  a  stock  bearing 
a  high  rate  of  dividends  may  be  retired  by  exchanging  for 
it  a  bond  bearing  a  low  interest  rate;  but  the  reorganiza- 
tion is  the  more  drastic  and  usually  entails  the  cancellation 
of  all  or  a  large  part  of  the  common  stock,  and  at  times, 
even  of  the  preferred  stock.  In  either  case  the  security 
holders  usually  lose  heavily,  because  the  securities,  as  a 
rule,  will  have  been  sold  by  the  original  holders  to  other 


ABUSES    AND    WEAKNESSES  419 

persons  for  cash.  It  is  only  rarely  that  the  original 
holders  suffer. 

(b)  Conversions.  —  In  1902,  the  Steel  Corporation 
launched  its  famous  bond  conversion  plan  about  which  there 
has  been  so  much  controversy.  The  corporation  needed 
$50,000,000  of  new  capital,  but  the  members  of  the  syndi- 
cate still  held  enormous  quantities  of  preferred  stock  which 
they  had  been  unable  to  sell  to  the  public.  A  new  issue 
of  securities  to  add  to  those  already  outstanding  was  out 
of  the  question.  The  plan  adopted  proposed  "  to  rearrange 
your  corporation's  capitalization  (which  in  round  numbers 
now  consists  of  $300,000,000  of  bonds,  $500,000,000  of  pre- 
ferred stock,  and  $500,000,000  of  common  stock)  by  sub- 
stituting for  $200,000,000  of  the  preferred  stock,  $200,000,- 
000  of  sinking  fund  sixty  year  5  per  cent  mortgage  gold 
bonds,  and  by  selling  $50,000,000  of  additional  bonds  of 
such  issue  for  cash.  As  the  preferred  stock  carries  7  per 
cent  dividends,  while  the  bonds  would  bear  but  5  per  cent 
interest,  the  $50,000,000  desired  could,  in  this  way,  be 
added  to  the  corporate  resources,  and  the  aggregate  of 
annual  charges  for  interest  and  dividends,  instead  of  being 
increased  $3,500,000  would  be  decreased  $1,500,000  as  com- 
pared with  the  present  sum  total  of  these  two  require- 
ments." ®  The  plan  was  not  well  received  by  the  stock- 
holders who  were  expected  to  give  up  a  7  per  cent  security 
for  one  paying  but  5  per  cent,  and  after  about  $150,000,000 
of  the  preferred  stock  had  been  converted  the  plan  was 
dropped. 

Numerous  other  big  companies,  instead  of  attacking  the 
problem  of  over-capitalization  at  once,  permitted  the 
claims  of  the  preferred  stockholders  against  the  earnings 
of  the  company  to  cumulate  until  they  even  exceeded  the 

6  An  account  of  tliis  bond  conversion  will  be  found  in  the 
Quarterly  Journal  of  Economics,  Vol.  XVIII,  1903,  pp.  22-53;  also 
in  Ripley,  Trusts,  Pools  and  Corporations. 


420         OWNERSHIP    ORGANIZATION    ABUSES 

total  par  value  of  the  outstanding  stock  of  this  class.  In 
the  case  of  the  old  United  States  Leather  Company,  or- 
ganized in  1893,  the  unpaid  dividends  due  the  preferred 
stockholders  accumulated  rapidly.  By  1905,  they 
amounted  to  41  per  cent  of  the  par  value  of  the  stock. 
In  1906,  the  company  was  reorganized,  the  common  stock- 
holders were  asked  to  surrender  some  70  per  cent  of  their 
stock  and  the  preferred  stockholders  received  about  75 
cents  on  the  dollar  out  of  their  accrued  dividends,  part  of 
it  in  the  form  of  new  common  stock. '^ 

(c)  Reorganizations.  —  Reorganizations  are  the  usual 
results  of  business  failure,  that  is,  the  failure  of  the  earnings 
to  support  the  burden  of  charges  that  were  placed  upon 
them.  It  is  a  historical  fact  that  many  of  the  great  indus- 
trial combinations  formed  during  the  early  and  late  nineties 
had  to  undergo  one  or  more  reorganizations  because  of  an 
actual  or  threatened  condition  of  insolvency  due  to  finan- 
cial embarrassment.  According  to  Dewing,^  "  these  finan- 
cial difficulties  were  not  the  consequence  of  over-capitaliza- 
tion as  is  usually  alleged.  These  corporations  did  not  fail 
because  the  capitalization  items  were  large  or  small.  They 
failed  because  their  earnings  were  inadequate  for  the  load 
put  upon  them.  If  the  load  was  .especially  burdensome 
by  reason  of  heavy  fixed  charges  and  unwarranted  dividend 
payments,  the  failure  was  all  the  more  certain.  The  direct 
cause  of  failure  in  every  instance  was  the  deflection  of 
working  capital  to  the  payment  of  interest  and  dividends. 
Beneath  this,  as  the  fundamental  cause,  was  the  lack  of 
judgment  of  promoters  in  placing  bonds  upon  an  untried 
industrial  enterprise  and  lack  of  conservatism  of  the  early 
management  in  paying  dividends  without  due  regard  to 
sound  principles  of  finance.  Every  corporation  discussed 
.    .    .  paid  out  interest  and  dividends  in  the  face  of  falling 

7  Dewing,  Corporate  Promotions  and  Reorganizations. 

8  Ibid.,  pp.  557  et  seq. 


ABUSES    AND    WEAKNESSES  421 

earnings,  and  none  need  have  suffered  serious  financial 
difficulties  had  the  amounts  paid  in  interest  and  dividends 
been  conserved.  Many  industrial  consolidations  more  ex- 
travagantly promoted,  with  far  greater  discrepancies  be- 
tween assets  and  capitalization,  have  continued  in  business 
uninterruptedly  to  the  present  time  and  are  prosperous, 
because  their  promoters  issued  no  bonds  and  their 
directors  exercised  a  wise  conservatism." 

The  same  writer  is  of  the  opinion  that  these  failures 
were  more  fundamentally  attributable  to  two  sets  of 
causes.  "  One  psychological  in  character  and  concerned 
with  the  difficulties  attending  the  administrative  manage- 
ment of  a  large  business.  The  other  was  economic  in  char- 
acter and  concerned  with  the  difficulties  attending  the 
creation  of  a  business  organization  sufficiently  powerful  to 
dominate  an  industry  in  the  presence  of  actual  or  potential 
competition." 

(d)  Dividend  Policies.  —  Aside  from  these  abuses  there 
are  others  that  arise  out  of  certain  practices  regarding  the 
declaration  and  payment  of  dividends. 

(1)  Failure  to  give  proper  recognition  to  depreciation 
of  assets  has  been  extremely  common.  According  to 
former  Chairman  Hurley  of  the  Federal  Trade  Board,  out 
of  60,000  corporations  fully  one-half  failed  entirely  to 
recognize  the  factor  of  depreciation  in  their  accounts. 
This,  in  view  of  over-capitalization,  is  a  serious  condition. 
Even  in  the  case  of  corporations  that  have  "  wasting 
assets  "  such  as  bodies  of  ore,  stands  of  timber,  veins  of 
coal,  etc.,  far  too  little  attention  is  paid  to  this  aspect  of 
accounting.  Under  such  conditions  the  declaration  of 
dividends  frequently  involves  the  impairment  of  assets. 
This  practice,  for  instance,  figured  prominently  in  the 
failures  of  the  United  States  Realty  Company,  the  National 
Starch  Company  and  others.^    But  in  justice,  it  must  be 

9  Ibid. 


422         OWNERSHIP    ORGANIZATION    ABUSES 

said  that  the  stronger,  more  conservative,  corporations 
follow  a  rigorous  policy  of  setting  aside  annually  a  portion 
of  earnings  as  a  replacement  reserve. 

(2)  Failure  to  distinguish  between  capital  and  income  in 
the  declaration  of  dividends  has  wrecked  many  a  corpora- 
tion in  its  infancy.  For  example,  the  directors  of  the  old 
American  Malting  Company,  in  spite  of  the  fact  that  it 
was  highly  over-capitalized,  succeeded  in  giving  it  a  seem- 
ing prosperity  by  declaring  dividends  out  of  assets.  The 
scheme  was  finally  discovered  by  the  stockholders  who  then 
brought  suit  against  the  directors  to  compel  them  to  restore 
to  the  company  the  funds  thus  misapplied.  The  trial  court 
sustained  the  directors,  but  the  Supreme  Court  of  the  state 
of  New  Jersey  reversed  this  decision  on  the  ground  that  the 
original  stockholders  will  change  and  the  new  ones  would 
be  the  ones  to  suffer,  and  that  the  directors  also  would 
thereby  be  permited  to  create  a  fictitious  prosperity  and 
then  to  sell  their  holdings  in  the  injured  corporation  to 
others  who  were  in  no  position  to  know  that  the  capital  had 
been  impaired.  The  court,  therefore,  ordered  the  directors 
to  reimburse  the  company."  The  same  practice  forced  the 
Consolidated  Lake  Superior  Company  into  bankruptcy  in 
1902,  and  the  United  States  Finishing  Company  in  1913. 
In  the  latter  case  it  was  reported  that  the  directors  had 
lifted  about  $1,250,000  out  of  the  capital  and  had  dis- 
tributed this  as  dividends.^' 

(3)  Insufficient  distinction  is  made  between  surplus  and 
undivided  profits.  The  surplus  may  be  in  the  form  of  in- 
vestments of  various  kinds,  while  the  undivided  profits  are 
cash  earnings  susceptible  to  distribution  in  the  form  of  divi- 
dends. It  frequently  happens  that  a  corporation  has  a 
large  surplus  but  its  earnings  for  the  fiscal  period  have 

10  Ibid. 

11  See  reports  concerning  these  companies  in  the  Commercial  & 
Financial  Chronicle,  1902  and  1913. 


ABUSES    AND    WEAKNESSES  423 

been  insufficient  to  enable  it  to  declare  its  regular  divi- 
dends. In  such  cases,  some  companies  have  borrowed 
money  through  the  issue  of  purchase-money  bonds  and 
have  paid  the  dividends  out  of  this.  The  question  arises, 
whether  this  is  an  impairment  of  capital.  It  would  seem 
that  the  safer  procedure  would  be  to  declare  a  scrip  divi- 
dend.   This  is  now  usually  done  under  such  circumstances. 

(4)  Another  important  question  is  whether  an  over- 
capitalized corporation  may  pay  dividends  out  of  earnings 
before  it  has  brought  its  assets  up  to  its  capitalization. 
A  number  of  cases  have  been  brought  to  court  on  this  point. 
In  many  of  them,  notably  one  brought  against  the  direc- 
tors of  the  National  Wall  Paper  Company  in  New  Jersey  in 
1907,  the  court  held  that  the  capital  account  and  the  divi- 
dend account  may  be  kept  separately,  and  that  the  stock- 
holders may  not  secure  an  order  restraining  directors  from 
declaring  dividends  out  of  earnings  even  when  a  condition 
of  over-capitalization  exists.  This  is,  then,  not  a  matter  in 
which  the  courts  will  assume  responsibility  of  protecting 
the  stockholder,  but  remains  a  business  risk  of  the  investor. 

4.  Speculation.  —  Speculation  has  been  the  bugbear  of 
the  business  world  ever  since  the  introduction  of  securities 
as  instrumentalities  of  organization.  It  thrives  on  the 
ease  of  transferablility  of  securities  and  active  trading  in 
them  on  exchanges  where  prices  are  quoted  from  day  to  day 
and  hour  to  hour.  From  the  days  of  John  Law  and  his 
"  Mississippi  Bubble,"  to  the  present  time,  it  has  called 
forth  a  deluge  of  criticism  resulting  in  legislative  enact- 
ments of  a  more  or  less  regulatory  character. 

A  speculative  interest  in  securities  is  essentially  different 
from  an  entrepreneurial  interest.  The  latter  centers  upon 
the  earnings  accruing  to  the  invested  capital  underlying  the 
securities,  while  the  former  rests  upon  changes  in  their 
market  price  as  quoted  on  exchanges.  The  speculator, 
therefore,  is  not  primarily  interested  in  the  condition  of  the 


424         OWNERSHIP    ORGANIZATION    ABUSES 

business  and  its  profits  but  in  its  securities  as  commodities 
in  themselves,  commodities  that  may  be  bought  and  sold 
like  so  many  bushels  of  wheat. 

Professional  and  amateur  speculators  abound.  They  are 
ordinarily  divided  into  two  classes:  (1)  bulls  who  buy 
securities  with  the  expectation  of  being  able  to  sell  them 
at  advanced  prices  and  (2)  bears  who  sell  stocks  in  the 
hope  of  being  able  to  rebuy  them  at  reduced  prices.  Since 
a  period  of  generally  rising  prices  favors  the  first  class,  it  is 
called  a  bull  market  and  correspondingly  a  period  of  gen- 
erally falling  prices  is  a  bear  inarket.  Thus,  one  class 
attempts  to  bring  about  a  rise  in  prices  while  the  other 
tries  to  depress  them.  This  frequently  results  in  a  "  cor- 
ner "  in  a  given  security;  that  is  to  say,  a  single  speculator, 
or  a  group  of  them,  obtains  a  practical  monopoly  of  the 
available  floating  supply.  One  of  the  most  notorious  cor- 
ners of  recent  years  was  in  the  stock  of  the  Stutz  Motors 
Corporation  during  which  the  quoted  prices  rose  from  $89 
per  share  to  the  dizzy  height  of  $730  per  share.  Such 
speculation  in  the  securities  of  a  company  naturally  does 
it  little  good. 

The  great  bulk  of  speculative  transactions  is  carried 
on  by  means  of  borrowed  money.  The  speculator  ordi- 
narily pays  from  10  to  15  per  cent  of  the  market  price  of 
the  securities  to  the  broker,  who  lends  him  the  balance,  re- 
taining possession  of  the  stocks  and  bonds  to  support  the 
loan.  This  method  of  speculation  is  called  "  playing  on  mar- 
gin." The  broker,  in  order  to  get  back  his  w^orking  capital, 
borrows  from  the  banks  by  pledging  the  securities  in  his 
possession  to  support  a  "  call  loan,"  that  is  to  say,  a  loan 
that  does  not  run  for  a  definite  period  of  time  but  is  sub- 
ject to  termination  whenever  the  bank  sees  fit  to  call  it. 
In  this  way  the  banks  become  involved  in  the  speculation, 
for  they  really  furnish  the  money  for  it.  Prior  to  the  pas- 
sage of  the  Federal  Reserve  Banking  Act,  in  1913,  there  was 


ABUSES    AND    WEAKNESSES  425 

little  opportunity  to  control  the  flow  of  funds  that  support 
the  operations  of  speculators,  but  the  Federal  Reserve 
Board  established  by  virtue  of  the  act  of  1913,  now  finds  it 
possible  to  exercise  some  measure  of  control  over  this  by 
raising  or  lowering  the  rediscount  rates  which  influence  the 
call  loan  rates. 

There  are  three  kinds  of  speculation  in  securities;  that 
carried  on  (1)  by  outsiders,  (2)  by  insiders,  and  (3)  by 
the  companies  themselves.  Speculation  by  outsiders  is 
very  extensive,  as  may  be  seen  by  a  glance  at  the  table 
showing  the  turnover  of  securities  of  a  number  of  large 
companies  given  in  a  preceding  chapter.^^  By  and  large, 
this  form  of  speculation  serves  a  very  useful  purpose,  but 
in  a  wasteful  way.  It  makes  it  possible  for  underwriters 
who  finance  companies  to  dispose  of  their  securities  even 
though  the  investing  public  is  not  ready  to  buy  them,  and 
thus  enables  them  to  free  their  funds  for  further  financing. 
But  excessive  speculation  in  the  securities  of  a  company 
tends  to  place  it  in  bad  repute  with  the  investing  and  busi- 
ness public.  Thus,  in  the  years  immediately  following 
1896  the  common  stock  of  the  United  States  Leather  Com- 
pany was  little  more  than  the  speculative  dice  of  Wall 
Street.  Ordinarily  the  stock  had  been  quoted  at  from  $5 
to  $10  a  share.  In  October  of  1899,  James  R.  Keene  tried 
to  "  corner  "  the  floating  supply  and  by  November  6th,  the 
price  had  risen  to  $40.87.  Two  days  later  it  had  fallen 
back  to  $20  and  by  the  end  of  the  month  it  was  again 
quoted  at  $10  per  share.  The  original  holders  seized  this 
brief  opportunity  to  dispose  of  their  common  stock  reserv- 
ing for  themselves  and  their  families  the  preferred  issues.^^ 
The  same  thing  happened  to  the  stock  of  one  of  our  big 
rubber  companies  ^^  and  many  others. 

12  Page  94. 

^3  Dewing,  Corporate  Promotions  and  Reorganizations,  pp.  24-25. 

1*  Analyst,  July,  1915. 


426         OWNERSHIP    ORGANIZATION    ABUSES 

Then  too,  the  directors  and  officers  of  the  company  fre- 
quently have  added  to  the  stigma  of  speculation  by  arti- 
ficially influencing  the  price  of  its  securities  to  their  own 
advantage.  Cases  have  come  to  the  attention  of  the  public 
where  financial  reports  have  been  falsified,  as  in  the  old 
Whiskey  Trust,^^  where  dividends  have  been  declared  out 
of  capital  as  in  the  National  Cordage  Company  ^^  and 
where  funds  have  been  shifted  between  two  or  more  com- 
panies to  give  a  semblance  of  strength  in  order  to  enable 
the  insiders  to  reap  a  speculative  profit  out  of  more  or 
less  worthless  securities.  In  1896,  the  same  people  who 
were  in  control  of  the  Diamond  Match  Company  also  con- 
trolled the  New  York  Biscuit  Company,  and  in  order  to  aid 
them  in  their  speculation  they  shifted  the  combined  funds 
of  both  companies  first  to  support  one  and  then  the  other, 
until  finally  both  were  in  financial  straits  and  the  collapse 
came.^' 

At  times,  those  who  are  in  control  of  a  company  may  feel 
that  it  is  necessary  for  them  to  take  a  hand  in  a  speculative 
manipulation  in  order  to  protect  the  company.  This  may 
be  justifiable,  but  it  is  a  risky  business  that  may  do  more 
harm  than  good.  As  a  result  of  such  a  manipulation  by 
Allen  A.  Ryan  resulting  in  a  "  corner  "  in  the  stock  of  the 
Stutz  Motors  Company,  the  Board  of  Governors  of  the 
New  York  Stock  Exchange  refused  to  permit  further  trans- 
actions in  this  security  on  the  Exchange.  Mr.  Ryan 
claimed  that  certain  interests  sought  to  depress  the  stock 
in  order  to  damage  the  company  and  that  he  merely  stepped 
in  to  prevent  this.  Such  operations,  however,  always  make 
a  bad  impression  upon  the  public,  especially  where  they 
are  undertaken  by  and  on  behalf  of  the  company  itself  as 
in  the  case  of  a  very  large    company,  which  from  1903 

■^^  See  Ripley,  Trusts,  Pools  and  Corporation.,^. 

^^  See  Dewing,  Corporate  Promotions  and  Reorganizations. 

1''  See  Commercial  &  Financial  Chronicle,  Sept,  1896. 


ABUSES    AND    WEAKNESSES  427 

to  1908,  was  accused  of  having  actually  bought  and  sold  its 
own  stocks  on  margin. 

5.  Unfair  Competition.  —  We  have  seen  how  the  great 
combinations  and  monopolistic  enterprises  are  in  a  posi- 
tion to  effect  economies  through  efficiency  in  the  technique 
of  production,  in  procuring  their  raw  materials  and  in  mar- 
keting their  finished  products.  They  combined  not 
primarily  to  secure  the  advantages  of  large  scale  produc- 
tion for  themselves  and  the  consumer,  but  sought  rather 
to  acquire  a  monopolistic  command  over  the  industry  in 
which  they  operated.  Most  of  them  have  failed  to  attain 
their  goal.  Some  were  checked  through  the  application  of 
the  anti-trust  laws  and  others  met  with  insurmountable 
practical  difficulties.  The  only  advantages  over  competitors 
that  they  enjoyed  were  chiefly  those  inherent  in  large  scale 
production,  but  these  were  also  attainable  by  their  smaller 
competitors.  Great  size,  huge  fixed  charges  and  burden- 
some administrative  expenses  bore  heavily  upon  them. 
Under  these  conditions,  the  benfits  that  combination  gave 
them  at  the  outset  were  rapidly  being  swallowed  up  by 
the  greater  costs  of  doing  business.  They  soon  began  to 
fear  their  competitors  and  resorted  to  many  questionable 
business  practices  to  suppress  them.  Many  of  these  big 
concerns  were  repeatedly  hauled  before  the  courts  to 
answer  charges  of  unfair  competition  that  were  launched 
against  them,  and  were  usually  found  guilty.  In  fact,  so 
general  did  this  practice  become  that  congress,  in  1914, 
gave  specific  attention  to  this  problem  in  the  Clayton  Act, 
supplementing  the  anti-trust  legislation,  and  in  the  act 
creating  the  Federal  Trade  Commission.  A  number  of 
the  states  also  have  adopted  similar  protective  legislation 
enforceable  through  fines  and  imprisonment. 

What  constitutes  unfair  methods  of  competition,  such 
as  are  contemplated  by  these  acts,  has  become  fairly  well 
established  through  court  decisions.    An  analysis  of  these 


428         OWNERSHIP    ORGANIZATION    ABUSES 

decisions  has  made  it  possible  to  classify  them  by  types 
such  as  those  given  below.^^  While  this  is  by  no  means  a 
complete  list,  it  will,  nevertheless,  serve  to  illustrate  in  a 
general  way  some  of  the  unfair  practices  that  have  been  ex- 
tensively employed  by  our  larger  business  concerns  to  en- 
trench and  maintain  themselves  in  a  commanding  position 
in  their  respective  industries. 

(a)  Local  price  cutting  stands  at  the  head  of  the  list. 
It  has  been  used  effectively  by  concerns  that  have  a  mar- 
ket which  extends  over  a  wide  geographic  area.  They  can 
cut  the  price  at  one  point  and  recoup  their  losses  by  slightly 
raising  it  at  other  points,  and  thus  crush  their  competitors 
one  after  another.  It  appears  at  one  time  to  have  been 
the  favorite  practice  with  the  Standard  Oil  Company  and 
with  E.  I.  du  Pont  de  Nemours  and  Company,  the  so-called 
Powder  Trust. 

(6)  Bogus  Competing  concerns  in  the  form  of  owned  or 
controlled  companies  have  also  played  their  part.  They 
are  easily  established  and  operated  through  the  holding 
company  organizations.  The  American  Tobacco  Company, 
the  Powder  Trust,  the  National  Cash  Register  Company, 
used  them  to  break  down  competition,  and  it  was  one  of 
the  few  illegal  practices  indulged  in  by  the  conservative 
International  Harvester  Company. 

(c)  Fighting  instruments  is  a  term  used  to  designate  a 
product  or  appliance  that  is  sold  or  operated  at  a  loss  for 
the  definite  purpose  of  breaking  down  a  competitors'  busi- 
ness. The  American  Tobacco  Company  used  its  "  Battle 
Ax  Plug  "  in  this  way,  the  Eastman  Kodak  Company  a 
certain  photographic  print  paper,  the  Waltham  Watch 
Company  one  of  its  cheap  watches,  and  even  the  big  ocean 

18  Dr.  W.  H.  S.  Stevens  in  a  little  book  entitled  "  Unfair  Com- 
petition "  has  worked  out  an  excellent  classification  and  descrip- 
tion of  these  practices  from  court  decisions  upon  which  the  one 
here  given  is  largely  based.  Case  references  may  be  found  in  this 
work. 


ABUSES    AND    WEAKNESSES  429 

and  river  transportation  companies  maintained  vessels 
which  could  be  put  into  service  to  prevent  the  establish- 
ment of  independent  competing  lines. 

(d)  Exclusive  and  rcstraming  contracts,  similar  to  those 
described  as  factors'  agreements,  also  are  unfair  practices. 
They  lead  to  a  great  deal  of  legislation  because  they  are 
so  frequently  used  in  conjunction  with  patented 
commodities. 

(e)  Rebates  and  preferential  contracts  have  been  ex- 
tremely common,  and  are  used  either  individually  or 
jointly.  A  fine  of  $29,000,000  was  at  one  time  imposed  by 
a  Federal  District  Court  upon  the  Standard  Oil  Company 
for  accepting  rebates  from  a  railway  company,  but  the 
decision  was  subsequently  reversed.  Nevertheless,  this  was 
one  of  the  favorite  illegal  practices  that  led  to  the  passage 
of  railway  rate  and  anti-trust  legislation,  and  it  was  quite 
common  prior  to  1890  and  still  crops  up  occasionally  in 
modified  form. 

(/)  Exclusive  control  of  machinery  used  in  manufactur- 
ing processes,  frequently  called  engrossing,  has  also  been 
charged  against  some  of  our  big  business  establishments. 
.It  is  secured  either  through  contracts  requiring  the  manu- 
facturer of  the  equipment  to  sell  his  whole  output  to  the 
controlling  concern,  or  through  control  of  the  patents  giv- 
ing the  exclusive  right  to  manufacture.  The  American 
Can  Company,  the  Eastman  Kodak  Company  and  the 
Standard  Envelope  Company  are  reported  to  have  pre- 
vented competition  from  springing  up  by  this  means. 

(g)  Black  listing  and  boycotting  have  been  very  popular 
among  lumber  dealers  who  sought  in  this  way  to  prevent 
price  cutters  from  securing  a  supply  of  lumber.  They  have 
also  been  common  in  other  fields  of  enterprise  and  have 
resulted  in  many  prosecutions. 

(h)  Intimidation  and  interference  were  among  the 
methods  employed  by  the  National  Cash  Register  Com- 


430         OWNERSHIP    ORGANIZATION    ABUSES 

pany,  the  Shredded  Wheat  Company  and  others.  Threats 
to  cut  off  the  supply  of  commodities  to  dealers,  under- 
mining the  morale  of  competitors  in  order  to  induce  them 
to  sell  out,  fomenting  strikes  in  the  plants  of  competitors 
and  hounding  them  with  lawsuits,  are  some  of  the  prac- 
tices that  come  in  this  class. 

(i)  Manipulation  of  the  markets  has  been  indulged  in,  in 
order  to  force  down  the  price  of  raw  materials  and  to  force 
up  the  price  of  finished  products.  The  packers  have  been 
charged  with  inducing  shippers  of  live  stock  to  send  their 
stock  to  yards  that  were  already  over-supplied.  The 
butter  producers  of  the  middle  West  used  "  wash  "  sales  to 
cover  their  price  manipulations. 

6.  Monopoly  and  Combinations  in  Restraint  of  Trade.  — 
The  monopoly  problem  is  subject  matter  for  a  course  in 
itself.  It  is  a  problem  that  is  constantly  before  the  busi- 
ness public  and  one  of  prime  importance.  It  is  the  anath- 
ema of  American  business.  But  after  all,  it  is  merely  a 
matter  of  degree  of  industrial  or  commercial  control,  and  the 
problems  that  it  presents  are  chiefly  those  that  have  already 
been  discussed,  but  in  a  somewhat  more  intensified  form. 

The  growth  and  development  of  monopolies  follows  in 
general  the  same  methods  that  lead  to  the  development 
of  large  scale  enterprises  and  combinations.  They  present 
no  new  features  of  organization  but  only  a  question  of 
policy.  While  it  is  one  of  the  cardinal  rules  of  English,  as 
well  as  American  common  law,  that  a  state  of  free  compe- 
tition is  the  ideal  state,  this  point  of  view  is  by  no  means 
universal.  In  Germany  and  other  European  countries, 
monopolies  have  been  accorded  legal  sanction  and  exist  in 
large  numbers,  more  or  less  under  government  control  and 
supervision.  Even  in  America,  the  attitude  toward  them, 
influenced  as  it  is  by  the  forces  of  economic  development, 
has  undergone  a  gradual  change  from  absolute  condemna- 
tion to  one  of  discrimination  between  "  good  "  and  "  bad  " 


ABUSES    AND    WEAKNESSES  431 

trusts,  and  the  application  of  the  "  rule  of  reason  "  by  the 
courts  in  interpreting  the  anti-monopoly  acts.  However, 
this  problem  is  not  one  that  falls  properly  within  the  scope 
of  this  work. 

The  many  evils  of  our  system  of  business  organization, 
its  weaknesses,  the  malfeasances  and  manipulations  that 
have  here  been  discussed  cannot  but  leave  an  unfavorable 
impression.  To  one  who  comes  into  constant  contact  with 
this  dark  side  of  American  business  life  the  picture  is  in- 
deed depressing.  It  is  this  aspect  of  business  that  has 
led  Mr.  Samuel  Untermeyer,  who  has  acted  as  attorney  for 
many  investigating  committees  and  has  prosecuted  many 
charges  of  violation  of  the  law  against  big  business  con- 
cerns and  their  managers  to  characterize  our  corporation 
system  in  the  following  words:  ^^  "Our  corporation  laws 
are  without  exception  the  loosest,  most  unjust  and  inade- 
quate, and  in  every  way  the  worst  with  which  any  civilized 
nation  is  afflicted.  They  are  a  snare  to  the  investor, 
minorities  are  helpless,  they  offer  a  premium  upon  dishon- 
esty and  furnish  the  safest  and  most  fruitful  field  to  the 
criminally  disposed  exploiter  for  the  practice  of  fraud  and 
oppression  upon  the  public.  Every  safeguard  that  other 
countries  have  thrown  about  their  citizens  has  been  re- 
jected by  us.  From  the  birth  to  the  death  of  the  corpora- 
tion the  system  is  utterly  wrong  and  designedly  so." 

This  is  surely  a  pessimistic  view,  and  it  is  not  without 
some  foundation.  The  evils  have  been  recognized.  They 
have  for  years  been  well  known.  Remedies  have  frequently 
been  proposed,  but  these  have  usually  failed  because  of 
lack  of  interest  and  insufficient  support  on  the  part  of  the 
general  public.  Nevertheless,  laudable  efforts  have  at 
times  been  made  through  the  passage  of  remedial  legisla- 
tion to  correct  these  evils  and  abuses.  These  will  be  briefly 
considered  in  the  closing  chapter. 

19  From  an  address  appearing  some  years  ago  in  the  Lawyer 
Citizen. 


CHAPTER  XXI 

PRESENT  AND  PROPOSED  REGULATION  AND  REFORM 

From  the  preceding  chapters,  we  have  seen  that  there 
are  at  present  many  regulatory  measures  in  the  statutes  of 
our  states  and  of  the  federal  government.  Nevertheless,  in 
spite  of  these  many  statutes  the  situation  is  not  encouraging. 
Many  of  the  state  laws  are  poorly  enforced,  and  the 
federal  laws  are  confined  largely  to  matters  of  interstate 
commerce.  Before  considering  what  should  be  done  to 
suppress  the  many  evils  and  abuses  of  the  system,  it  is 
well  to  review  briefly  some  of  these  state  and  federal  laws. 

State  Regulation  and  Control 

Much  has  been  done  by  state  legislatures  and  constitu- 
tional conventions  for  the  protection  of  the  public,  the 
stockholder  and  the  creditor  of  the  corporation.  A  few 
states  have  attacked  the  problem  in  a  spirit  of  fairness  and 
justice.  But  in  most  instances  these  regulatory  measures 
stand  as  isolated  attempts  rather  than  as  well  conceived 
parts  of  a  complete  and  orderly  system  of  reform. 

Corporate  Control.  —  The  all  important  problem  of  cor- 
porate control  has  received  considerable  attention.  A  few 
states  have  constitutional  provisions  prescribing  voluntary 
or  compulsory  use  of  the  cumulative  system  of  voting  at 
the  election  of  directors,  thus  seeking  to  assure  a  sizeable 
minority  of  proper  representation  on  the  board  of  directors. 
Many  others  have  provided  for  the  same  thing  by  statute. 
The  evil  of  the  long-time  proxy  has  been  recognized  and 
met  by  requiring  that  a  proxy  is  valid  only  if  granted  within 

432 


REGULATION    AND    REFORM  433 

a  period  of  a  few  months,  or  a  year,  before  the  election  at 
which  it  is  to  be  used.  A  number  of  states  have  even  rec- 
ognized the  danger  of  the  voting  trust  as  a  means  of  divest- 
ing the  stockholders  of  the  proper  exercise  of  their  voice 
in  the  management  and  direction  of  the  corporation,  and 
have  limited  the  life  of  such  trusts  to  a  period  of  five  years. 
But,  on  the  other  hand,  the  majority  voting  system  still 
prevails  and  in  a  few  states  the  bondholders  are  given 
voting  power. 

Responsible  Management.  —  To  secure  responsible  man- 
agement by  directors  most  of  the  states  have  passed  laws 
declaring  directors  to  be  liable  for  all  damages  resulting 
from  wilful  acts  or  culpable  negligence.  A  few  have  even 
gone  as  far  as  to  provide  for  penitentiary  and  jail  sentences 
for  directors  who  are  guilty  of  violations  of  the  law.  Special 
attention  has  been  given  to  the  question  of  the  declaration 
of  illegal  dividends.  In  practically  every  state  are  found 
statutes  prohibiting  the  declaration  of  dividends  that  will 
impair  the  capital  of  the  corporation  or  that  will  render 
it  insolvent.  But  very  seldom  do  they  go  further  than  that. 
Here  and  there,  we  find  isolated  cases  where  directors  are 
required  to  reimburse  the  corporation  for  illegal  dividends, 
and  others,  where  they  are  made  liable  for  certain  debts 
of  the  corporation  incurred  during  their  term  of  office. 
Nevertheless,  the  control  over  the  board  of  directors  is  left 
largely  to  by-law  provisions,  and  in  some  of  the  states  the 
directors  still  have  the  power  to  change  the  by-laws,  thus 
making  the  rules  for  the  game  as  they  play  it.  Even  the 
restrictions  concerning  dividends  are  discounted  by  the 
courts,  who  have  held  that  the  corporation  may  keep  a 
separate  account  of  income  and  capital,  so  that  even  though 
the  capital  depreciates,  dividends  may  still  be  declared  if 
there  have  been  earnings. 

Capitalization.  —  The  subject  of  capitalization  also  has 
received  some  attention.    Some  of  the  states  have  attacked 


434         OWNERSHIP    ORGANIZATION    ABUSES 

excessive  watering  by  prescribing  that  a  certain  amount  of 
the  authorized  capital  stock  must  be  subscribed  and  paid 
in  before  the  charter  will  vest.  But  these  requirements  still 
are  inadequate,  for  they  range  from  10  to  50  per  cent  of 
the  total  authorized  capital  stock.  Some  attempt  has 
also  been  made  to  prevent  the  sale  of  stock  for  less  than  its 
par  value,  and  to  require  that  property  and  services  obtained 
in  exchange  for  stock  must,  at  a  fair  valuation,  be  equal  to 
the  par  value  of  the  stock  given  in  exchange.  Other  states 
have  dismissed  the  whole  question  of  par  value  by  permit- 
ting the  issue  of  stock  without  par  value.  A  number  of 
state  constitutions  have  provisions  affecting  the  issue  of 
bonds,  usually  requiring  that  bonds  shall  be  issued  for 
real  value  only,  and  declaring  bonds  issued  for  a  fictitious 
value  to  be  void.  Many  states  also  have  statutory  limi- 
tations on  the  amount  of  bonds  that  a  corporation  may 
issue.  In  some  instances,  the  maximum  bonded  indebted- 
ness that  may  be  incurred  must  be  stated  in  the  charter; 
in  others  it  must  not  exceed  the  amount  of  the  capital 
stock ;  in  others  it  must  not  exceed  50  per  cent  thereof,  and 
in  a  few  it  cannot  exceed  one  half  of  the  value  of  the 
assets. 

Some  attempt  has  also  been  made  to  protect  the  stock- 
holder against  an  issue  of  bonds  by  the  directors.  Thus, 
we  find  in  perhaps  a  dozen  states  that  the  consent  of 
two-thirds  or  three-quarters  of  the  stockholders  is  neces- 
sary to  authorize  bond  issues,  and  in  others  there  are 
restrictions  and  limitations  on  the  issue  of  convertible 
bonds.  But  in  most  of  the  states  a  mere  majority  vote 
is  sufficient,  while  in  others  the  directors  have  power  over 
this  important  matter. 

Systematic  Reform.  —  As  before  stated,  the  measures 
described  above  are  more  or  less  isolated  instances  where 
a  single  problem  has  received  attention.  There  have  been 
a  few  attempts  by  states  to  effect  a  general  revision  of  the 


REGULATION    AND    REFORM  435 

the  corporation  laws  with  a  view  to  systematizing  their  re- 
form measures.  This  has  been  the  case  in  Missouri  and 
New  Hampshire  where  excellent  laws  are  now  in  force. 
However,  such  general  reforms  are  of  little  avail  unless 
they  are  instituted  by  all  or  at  least  a  great  majority 
of  the  states.  Under  present  conditions  incorporators  avoid 
the  states  where  strict  laws  prevail  and  flock  to  those  where 
incorporation  is  cheap,  where  the  powers  granted  are  broad 
and  where  there  is  a  minimum  of  regulation. 

The  **  Seven  Sisters"  of  New  Jersey.  —  In  the  above 
connection  we  need  but  call  to  attention  the  experience  of 
the  state  of  New  Jersey  with  its  corporation  reform  of 
1913,  commonly  known  as  the  "  Seven  Sisters  "  laws.  In 
1908,  a  commission  was  appointed  to  prepare  a  report  on  a 
proposed  revision  of  the  corporation  laws  of  that  state. 
This  report  sustained  the  existing  system  by  saying  "  that 
the  prejudice  against  corporations,  common  in  other  com- 
munities, hardly  had  an  existence  here;  that  the  legislature 
did  not  amend  the  revised  statutes  recklessly;  and  still 
more  important,  that  the  courts  of  this  state  were  conserva- 
tive, reliable  and  just,  in  supporting  the  rights  of  property, 
and  especially  learned  in  the  great  questions  of  equity  law 
so  constantly  brought  into  play  in  the  management  of  cor- 
porations. Furthermore,  the  law  was  not  lax  in  its  terms 
nor  in  its  interpretation  by  the  courts.  It  was  liberal,  fair 
and  sound."  But  in  his  message  to  the  New  Jersey  Legis- 
lature in  1912,  Woodrow  Wilson,  who  was  then  gover- 
nor of  that  state,  attacked  these  selfsame  laws  in  the  fol- 
lowing words:  "The  corporation  laws  of  this  state  are 
notoriously  in  need  of  alteration.  They  are  manifestly  in- 
consistent with  the  policy  of  the  people  in  the  all  important 
matter  of  monopoly,  to  which  the  attention  of  the  whole 
nation  is  so  earnestly  directed.  .  .  .  The  laws  of  New 
Jersey  as  they  stand,  so  far  from  checking  monopoly  ac- 
tually encourage  it.    They  explicitly  permit  every  corpora- 


436         OWNERSHIP    ORGANIZATION    ABUSES 

tion  formed  in  New  Jersey,  for  example,  to  purchase,  hold, 
assign  and  dispose  of  as  it  pleases,  the  securities  of  this  or 
that  corporation  and  to  exercise  at  pleasure  the  full  rights 
of  ownership  in  them,  including  the  right  to  vote." 

Accordingly,  a  set  of  seven  bills  was  drafted  and  subse- 
quently passed,  comprising  chapters  13  to  19,  inclusive,  of 
the  Session  Laws  of  1913.  The  first  of  these  chapters  was  a 
strict  anti-trust  law.  The  second  applied  strict  rules  to 
the  valuation  of  property  exchanged  for  stock  and  provided 
also  that  the  stock  of  another  corporation  could  be  pur- 
chased only  when  the  property  of  that  corporation  was 
"  cognate  in  character  and  use  to  the  property  used,  or  con- 
templated to  be  used,"  by  the  purchasing  corporation  in 
the  direct  conduct  of  its  proper  business.  The  third  made 
it  unlawful  to  sell  any  commodity  or  render  any  public 
service  at  a  lower  rate  in  one  section  of  the  state  than  in 
another.  The  fourth  made  it  a  misdemeanor  to  organize 
or  to  operate  a  corporation  with  intent  to  use  it  directly 
or  indirectly  in  restraint  of  trade  or  in  acquiring  or  foster- 
ing a  monopoly.  The  fifth  struck  out  the  famous  clause 
empowering  corporations  to  hold  and  vote  the  stock  of 
other  corporations.  The  sixth  provided  that  no  corpora- 
tions previously  or  subsequently  organized  should,  with 
certain  limited  exceptions,  such  as  to  provide  for  employees 
benefit  funds,  purchase  or  hold  stock,  bonds  or  other  securi- 
ties in  any  other  corporation.  The  seventh  provided  that 
before  any  merger  of  corporations  could  be  made,  approval 
must  first  be  obtained  in  writing  from  the  Board  of  Public 
Utility  Commissioners. 

The  effect  of  these  laws  was  felt  immediately.  Revenues 
from  corporation  franchise  taxes  began  to  fall  off  and  the 
granting  of  new  charters  followed  suit.  Delaware  took  the 
place  of  New  Jersey  as  the  home  of  the  ^.merican  corpora- 
tions. Under  these  conditions,  the  first  counter  attack  was 
not  long  delayed.    In  1915,  the  power  of  purchasing  stock 


REGULATION    AND    REFORM  437 

and  bonds  for  investment  purposes  was  restored.  In  1917, 
the  third  and  sixth  of  the  "  Seven  Sisters  "  were  disposed  of 
by  repeal  and  the  second  was  amended.  It  was  pro- 
vided that  any  corporation  formed  under  any  law  of  this 
state  might  purchase  stock  of  any  other  corporation  under 
certain  liberal  definitions  and  restrictions.  In  1920,  the 
fourth  of  these  laws,  therefore  remaining  unaltered,  was 
repealed,  and  additional  laws  were  passed  reducing  taxes 
and  fees  of  incorporation,  providing  for  the  issue  of  non- 
par value  shares  and  for  the  evaluation  and  purchase  of 
shares  of  a  dissenting  stockholder  upon  the  merger  or 
consolidation  of  two  or  more  corporations. 

Thus,  was  this  laudable  attempt  at  reform  engulfed  in 
a  wave  of  reaction.  It  seems  a  hopeless  task  for  the  states 
to  effect  any  lasting  improvement  in  the  laws  governing 
corporate  organization  so  long  as  they  act  individually. 
Only  through  joint  action  and  the  adoption  of  uniform 
laws  can  it  succeed.  Some  measure  of  progress  has  been 
made  in  this  way,  particularly  through  the  adoption  of  the 
principle  of  the  so-called  "  blue  sky  "  laws  and  the  Uniform 
Stock  Transfer  Act. 

"Blue  Sky"  Laws.  —  The  general  laws  passed  by  the 
states  seeking  to  prevent  fraud  and  misrepresentation  in 
respect  to  securities  offered  for  sale  within  their  jurisdiction 
are  called  "  blue  sky  "  laws.  They  are  more  or  less  alike  in 
principle  but  differ  greatly  in  the  procedure  prescribed  to  se- 
cure enforcement.  One  of  the  earliest  of  these  laws  was 
enacted  by  the  state  of  Kansas.  This  law  requires  that  every 
corporation,  co-partnership  and  association,  with  certain  ex- 
ceptions such  as  banks,  trust  companies,  etc.,  which  sells 
or  negotiates  for  the  sale  of  any  stocks,  bonds  or  other 
securities  in  the  state  shall  pay  a  small  fee  and  file  with 
the  bank  commissioner:  (1)  A  statement  showing  in  full  de- 
tail the  plan  upon  which  it  proposes  to  transact  business; 
(2)   a  copy  of  all  contracts,  bonds  or  other  instruments 


438         OWNERSHIP    ORGANIZATION    ABUSES 

which  it  proposes  to  make  with  or  sell  to  its  contributors; 
(3)  a  statement  which  will  show  the  name  and  location  of 
the  investment  company;  (4)  an  itemized  account  of  its 
actual  financial  condition  and  the  amount  of  its  property 
and  liabilities;  and  (5)  such  other  information  touching  its 
affairs  as  the  bank  commissioner  may  require.  The  bank 
commissioner  is  then  directed  to  ascertain  whether  the 
company  is  solvent  and  whether  it  intends  to  do  business 
in  a  fair  and  lawful  manner;  and,  if  in  his  judgment,  it 
promises  a  fair  return  on  the  investment  he  may  license 
it  to  carry  on  dealings  in  securities  within  the  state.  There- 
after, every  investment  company  thus  licensed  must  file 
an  annual  report  in  such  a  form  as  may  be  prescribed  by 
the  bank  commissioner.  Severe  penalties  are  imposed  for 
violations  of  the  provisions  of  the  act. 

Other  laws,  such  as  those  of  New  York,  Maryland  and  a 
large  number  of  other  states  do  not  prescribe  a  licensing 
system  but  merely  empower  the  attorney-general,  or  some 
other  state  official,  to  investigate,  either  upon  complaint 
or  his  own  initiative:  (1)  The  issuance,  sale,  promotion, 
negotiation,  advertisement  or  distribution  of  securities 
where  there  appears  to  be  a  purpose  to  defraud  or  to  ob- 
tain money  or  property  by  means  of  any  false  pretense, 
representation  or  promise;  (2)  where  there  is  a  suspicion 
that  fictitious  or  pretended  purchases  or  sales  of  securities 
are  made  or  contemplated;  and  (3)  where  there  is  suspicion 
that  dealings  in  securities  are  fraudulent  or  in  violation  of 
the  law.  If  the  attorney-general  finds  that  the  law  has 
been,  or  is  about  to  be,  violated  he  may  apply  to  the 
supreme  court  for  a  restraining  injunction,  and  if  this  is 
not  observed  he  may  proceed  with  civil  or  criminal  prose- 
cution.^ 

A  considerable  number  of  states  have  laws  that  regulate 
the  purchase  and  sale  of  a  very  limited  class  of  securities. 

1  The  Maryland  law  of  1921  is  given  in  Part  VI,  pp.  589-592. 


REGULATION    AND    REFORM  439 

These  are  patterned  after,  but  are  not  true  "  blue  sky  " 
laws. 

Uniform  Stock  Transfer  Act.  —  In  order  to  bring  uni- 
formity into  the  rules  and  regulations  governing  the  trans- 
fer of  title  to  shares  of  stock  a  law  called  the  "  Uniform 
Stock  Transfer  Act  "  was  prepared  some  years  ago  and 
submitted  to  the  several  state  legislatures  for  enactment. 
At  the  present  time  about  one-third  of  the  states  have  in- 
corporated it  in  their  statutes.  It  sets  forth  in  great  detail 
rules  for  delivery,  indorsements,  title,  surrender  and  trans- 
fer of  certificates,  and  the  effect  thereon  of  fraud,  duress, 
mistakes,  revocation,  death  or  incapacity  and  lack  of  law- 
ful consideration.  Among  the  states  that  have  adopted 
this  act  are  Massachusetts,  New  York,  Pennsylvania,  Ohio, 
Maryland,  Rhode  Island  and  Michigan. 

Federal    Legislation 

Federal  legislation,  in  so  far  as  it  relates  to  the  owner- 
ship organization  in  business,  is  naturally  limited  in  its 
scope.  The  federal  government  is  one  of  delegated  powers 
only,  and  any  powers  of  regulation  over  the  business 
ownership  organization  must  be  expressly  granted  to  it  in 
the  constitution  of  the  United  States. 

It  is  specifically  authorized  to  provide  and  to  maintain 
a  uniform  system  of  currency,  and  to  regulate  commerce 
between  the  several  states  and  with  foreign  nations.  Under 
the  former  clause  the  United  States  chartered  and  main- 
tained two  United  States  Banks,  the  first  during  the 
period  from  1796  to  1816  and  the  second  from  1816  to 
1836.  Under  the  same  clause  it  also  provided,  in  1862,  for 
the  formation  and  operation  of  the  National  Banks  which 
were  superseded  by  the  Federal  Reserve  Banking  System 
in  1911.  However,  it  is  under  the  interstate  commerce 
clause  that  most  of  the  congressional  legislation  relating 
to  ownership  organizations  in  business  has  been  passed.    In 


UO        OWNERSHIP    ORGANIZATION    ABUSES 

general,  this  legislation  may  be  grouped  under  two  heads, 
namely,  (1)  that  which  deals  primarily  with  transporta- 
tion and  (2)  that  which  seeks  to  prevent  monopoly  and  to 
preserve  competition,  commonly  known  as  "  anti-trust " 
legislation. 

The  Interstate  Commerce  Commission  Act  of  1887. — 
This  act  has  to  do  chiefly  with  the  regulation  of  railway 
freight  and  passenger  rates  and  specifically  prohibited  the 
pooling  of  aggregate  or  net  earnings.  It  also  provided  for 
the  appointment  by  the  President  of  an  Interstate  Com- 
merce Commission  of  five  members  with  a  term  of  office  of 
six  years.  The  commission,  among  other  things,  is  author- 
ized to  require  of  each  carrier  an  annual  report  containing 
detailed  information  on  capitalization,  equipment,  labor, 
receipts,  operating  and  other  expenses  and  a  statement  on 
financial  operations,  including  an  annual  balance-sheet.  The 
act  as  amended,  in  1893,  also  gave  the  commission  com- 
pulsory power  of  investigation. 

The  Elkins  Act  of  1903.  —  This  was  apparently  in- 
tended to  protect  both  the  public  and  the  railroads  against 
the  monopolistic  industrial  combinations  w^iich  brought 
pressure  to  bear  upon  the  railroads  for  preferential  treat- 
ment. It  specifically  made  corporations  as  well  as  their 
agents  liable  for  violations  of  the  interstate  commerce  laws, 
whereas  the  older  laws  made  the  agents  alone  liable. 

The  Hepburn  Amendment  of  1906.  —  This  act  extended 
the  scope  of  the  interstate  commerce  laws  to  express  com- 
panies, sleeping-car  companies  and  pipe  lines  for  the  trans- 
portation of  oil  or  other  commodities,  except  water  and 
gas.  It  also  empowered  the  commission  to  prescribe  a  uni- 
form system  of  accounts  for  all  railroads  engaged  in  inter- 
state commerce. 

The  Transportation  Act  of  1920.  —  During  the  war  the 
railroads  together  with  other  transportation  facilities  were 
taken  over  and  operated  by  the  government.    After  the  ces- 


REGULATION    AND    REFORM  441 

sation  of  hostilities  many  suggestions  were  made  and  plans 
formulated  as  to  what  should  be  done  with  the  railroads. 
There  was  a  strong  sentiment  that  they  should  be  retained 
by  the  government,  and  a  plan  known  as  the  Plum  Plan, 
even  proposed  that  they  should  be  turned  over  to  the  em- 
ployees who  should  guarantee  their  former  owners  a  definite 
return  on  their  investments.  In  1920,  two  bills  were 
introduced  into  Congress,  one  by  Senator  Cummins  and  the 
other  by  Representative  Esch,  each  of  which  was  passed, 
respectively  by  the  Senate  and  the  House.  As  the  bills  did 
not  agree  on  many  points  they  were  referred  to  a  confer- 
ence committee,  which  thereupon  prepared  the  bill  which 
was  afterwards  approved  by  both  houses  and  signed  by 
the  President.  This  law  is  now  commonly  known  as  the 
"  Transportation  Act  of  1920."  In  addition  to  providing 
for  regulation,  assuring  the  railroads  a  return  of  6  per  cent 
on  a  fair  valuation  of  their  properties  for  a  period  of  two 
years  and  establishing  a  Railroad  Wage  Board,  there  are 
certain  provisions  relating  to  organization.  The  Cummins 
Bill  provided  for  the  compulsory  consolidation  of  the  rail- 
way companies  into  not  less  than  20  nor  more  than  30 
great  systems.  In  the  final  measure,  this  compulsory 
feature  was  eliminated,  but  the  Interstate  Commerce  Com- 
mission was  directed  to  "  prepare  and  adopt  a  plan  for  the 
consolidation  of  the  railway  properties  of  the  continental 
United  States  into  a  limited  number  of  systems."  Compe- 
tition should  be  preserved  as  fully  as  possible  and  the 
several  systems  should  be  so  arranged  that  they  could 
compete  with  one  another  on  about  equal  terms  in  the  mat- 
ter of  cost  of  transportation,  value  of  property,  etc.,  in  order 
that  uniform  rates  might  prevail.  The  Commission  is 
now  at  work  on  its  plan  for  consolidation,  and  it  is  highly 
probable  that  a  law  providing  for  compulsory  combination 
will  be  submitted  to  Congress  in  the  near  future. 

The  difficulty  experienced  in  forcing  railroads  to  com- 


442         OWNERSHIP    ORGANIZATION    ABUSES 

pete  coupled  with  the  fact  that  they  render  a  necessary  pub- 
lic service  that  must,  under  any  circumstances,  be  maintained 
is  certain  to  force  a  reorganization  that  will  in  no  small  de- 
gree affect  the  independence  and  freedom  of  private  owner- 
ship. The  government  has,  by  no  means,  come  to  a  final  de- 
termination as  to  what  the  ownership  organization  in  this 
important  industry  shall  be. 

Federal  Anti-Trust  Legislation.  —  Contrary  to  the  gen- 
eral impression,  anti-trust  legislation  was  first  inaugurated 
by  several  of  the  states  before  the  federal  government  took 
up  this  problem.  In  Kansas,"  Michigan,  and  North  Carolina 
such  laws  were  enacted  as  early  as  1889,  and  a  number  of 
other  states  followed  this  lead  in  the  following  year,  at 
which  time  the  famous  Sherman  Anti-Trust  Law  was  in- 
corporated into  the  federal  statutes. 

The  Sherman  Anti-Trust  Law  of  1890.  —  The  nature  of 
the  conditions  which  led  to  the  enactment  of  this  law  by 
Congress  have  already  been  sufficiently  indicated  and  need 
not  be  repeated  here.  The  law  itself  is  very  short  and  con- 
cise, and  its  meaning  at  the  time  of  its  passage  seemed  to 
be  quite  clear. ^  Nevertheless,  it  has  been  amended  on 
several  occasions  to  correct  weaknesses  and  to  clarify  cer- 
tain doubtful  points.  The  first  section  declares  "  every 
contract,  combination  in  the  form  of  trust  or  otherwise,  or 
conspiracy,  in  restraint  of  trade  or  commerce  among  the 
several  states,  or  with  foreign  nations  "  to  be  illegal  and 
makes  anyone  who  enters  into  any  such  contract,  combina- 
tion or  conspiracy  guilty  of  a  misdemeanor  punishable  by 
fine  or  imprisonment  or  both.  Section  two  declares  it  to  be 
a  misdemeanor  "  to  monopolize,  or  attempt  to  monopolize, 
or  combine  or  conspire  with  any  other  person  or  persons, 
to  monopolize  any  part  of  trade  or  commerce  "  that  might 
fall  under  the  interstate  commerce  clause.    Section  three  de- 

2  A  rpprint  of  this  Kansas  law  is  p:ivrn  in  Part  VI,  pp.  588-589. 
"  The  act  is  given  in  full  in  Part  VI,  pp.  58G-588. 


REGULATION    AND    REFORM  443 

fines  more  clearly  just  what  commerce  shall  be  within  the 
scope  of  the  act.  Sections  four  and  five  provide  for  the  en- 
forcement of  the  act.  Section  six  provides  that  any  property 
in  course  of  transportation  in  violation  to  the  act  shall  be 
subject  to  forfeiture  to  the  United  States.  Section  seven  au- 
thorizes anyone  who  has  sustained  injury  or  damage  by 
virtue  of  a  violation  of  the  act  to  recover  "  three  fold  the 
damages  sustained,  and  the  costs  of  the  suit,  including  a 
reasonable  attorney's  fee."  The  last  section  defines  the  word 
"  person  "  or  "  persons  "  to  include  all  corporations  and 
associations. 

Under  this  act  the  federal  government  waged  its  war 
against  monopolies  and  combinations  in  restraint  of  trade. 
Since  its  enactment,  the  courts  of  the  United  States  from 
the  district  courts  to  the  Supreme  Court,  have  rendered 
hundreds  of  decisions.  Under  it,  the  Standard  Oil 
and  Tobacco  combines,  the  Northern  Securities  Company, 
and  a  great  number  of  others  of  like  character  were  dis- 
solved in  a  desperate  attempt  to  restore  a  state  of  free  and 
open  competition.  But  it  was  soon  found  that  the  law 
was  not  comprehensive  enough,  and  it  has  been  amended 
on  several  occasions. 

The  Anti-Trust  Amendments  to  the  Wilson  Tariff  Act 
of  1894.  —  The  question  of  trusts  again  came  up  in  Con- 
gress during  the  hearing  on  the  proposed  tariff  revision  in 
1894,  with  the  result  that  the  Wilson  Tariff  Act,  passed  in 
that  year  carried  a  provision  declaring  every  "  combina- 
tion, conspiracy,  trust,  agreement  or  contract  made  by  or 
between  two  or  more  persons  or  corporations  either  of  whom 
is  engaged  in  importing  any  article  from  foreign  countries 
into  the  United  States  "  to  be  illegal  when  such  an  act  is 
intended  to  operate  in  restraint  of  lawful  trade,  or  free 
competition  or  to  increase  the  market  price  of  any  article 
imported  or  any  manufactures  into  which  the  article  enters 
or  is  intended  to  enter.  This  law  was  again  amended  in 
1913  to  correct  certain  defects. 


Ui         OWxXERSHIP    ORGANIZATION    ABUSES 

The  Federal  Trade  Commission  Act  of  1914.  —  Ex- 
perience with  the  Sherman  Act  had  shown  that  one  of  the 
greatest  obstacles  standing  in  the  way  of  its  enforcement 
was  the  absence  of  any  permanent  body  which  might  collect 
evidence  of  violations  and  then  frame  plans  whereby  the 
evils  might  be  corrected.  It  left  the  collection  of  evidence 
in  the  hands  of  the  Department  of  Justice,  while  the  decrees 
of  dissolution  had  to  be  drawn  up  by  the  courts.  This 
placed  an  exceptionally  heavy  burden  of  responsibility 
upon  both  of  these  important  divisions  of  the  government. 
The  problem  received  the  attention  of  congress,  which,  in 
1914,  enacted  the  bill  creating  the  Federal  Trade  Com- 
mission. 

This  act  provides  for  appointment,  by  the  President  with 
the  advice  and  consent  of  the  Senate,  of  five  commissioners 
for  a  term  of  office  of  five  years,  not  more  than  three  to  be 
of  the  same  political  party.  The  commission  is  empowered 
to  choose  its  own  chairman.  The  act  specifically  declares 
"  unfair  methods  of  competition "  to  be  unlawful  and 
directs  the  commission  to  prevent  their  use,  empowering 
it  to  demand  summarily  the  discontinuance  of  the  prac- 
tices and  to  bring  suit  in  the  circuit  courts  of  the  United 
States  to  force  compliance. 

Certain  additional  powers  also  granted  to  the  commis- 
sion pertain  to  all  business  that  falls  under  the  interstate 
commerce  clause  except  that  of  banks  and  common  carriers. 

These  are  as  follows: 

(a)  To  gather  and  compile  information,  and  to  investi- 
gate from  time  to  time  the  organization,  business,  conduct, 
practices  and  management  of  any  corporation  engaged  in 
commerce,  except  those  above  excluded. 

(6)  To  require  by  general  or  special  orders,  corporations 
engaged  in  commerce  to  file  with  the  commission  in  such 
form  as  the  commission  may  prescribe  annual  or  special,  or 
both  annual  and  special,  reports  or  answers  in  writing  to 


REGULATION    AND    REFORM  445 

specific  questions,  furnishing  to  the  commission  such  in- 
formation as  it  may  require  as  to  organization,  business, 
conduct,  practices,  management  and  relation  to  other  cor- 
porations, partnerships  and  individuals.  The  commission 
may  require  such  reports  to  be  made  under  oath. 

(c)  To  make  investigations,  upon  its  own  initiative,  of 
the  manner  in  which  any  decree  made  by  the  courts  to  pre- 
vent and  restrain  any  violation  of  the  anti-trust  acts 
is  being  carried  out.  The  Attorney-General  may  also  call 
upon  the  commission  for  the  same  service. 

(d)  Upon  the  direction  of  the  president  or  either  house 
of  congress  to  investigate  and  report  the  facts  relating  to 
any  alleged  violations  of  the  anti-trust  acts  by  any  cor- 
poration. 

(e)  Upon  the  application  of  the  Attorney-General  to 
investigate  and  make  recommendations  for  the  readjust- 
ment of  the  business  of  any  corporation  alleged  to  be 
violating  the  anti-trust  acts  in  order  that  the  corporation 
may  thereafter  maintain  its  organization,  management  and 
conduct  of  business  in  accordance  with  law. 

(/)  From  time  to  time  to  make  public  such  portions  of 
the  information  obtained  by  it,  except  trade  secrets  and 
names  of  customers,  as  it  shall  deem  expedient  or  in  the  pub- 
lic interest;  and  to  make  annual  and  special  reports  to  con- 
gress and  to  submit  therewith  recommendations  for  ad- 
ditional legislation;  and  to  provide  for  the  publication  of 
its  reports  and  decisions  in  such  form  and  manner  as  may 
be  best  adapted  for  public  information  and  use. 

ig)  From  time  to  time  to  classify  corporations  and  to 
make  rules  and  regulations  for  the  purpose  of  carrying  out 
the  provisions  of  the  act. 

(h)  To  investigate,  from  time  to  time,  trade  conditions 
in  and  with  foreign  countries  where  associations,  combina- 
tions or  practices  of  manufacturers,  merchants,  or  traders, 
or  other  conditions  may  affect  the  foreign  trade  of  the 


446         OWNERSHIP    ORGANIZATION    ABUSES 

United  States,  and  to  report  to  congress  thereon,  with  such 
recommendations  as  it  deems  advisable. 

Further  provisions  of  the  act  deal  largely  with  the  filing 
of  suits  and  the  conduct  of  trials  and  hearings. 

The  Clayton  Act.  —  At  the  time  that  the  Federal  Trade 
Commission  Act  was  under  consideration  by  Congress, 
ways  and  means  of  strengthening  the  Sherman  Act  were 
also  taken  up.  The  reports  of  the  Pujo  Commission  on 
the  so-called  "  Money  Trust  "  had  brought  to  light  new 
problems  of  combination  that  involved  the  big  banking  and 
financial  interests,  and  the  problem  of  unfair  competition 
had  assumed  threatening  proportions.  To  meet  these  old 
and  new  problems  Congress,  in  1914,  enacted  the  Clayton 
Bill. 

This  law  declares  it  to  be  unlawful  to  discriminate  in 
price  between  different  purchasers  of  commodities  where 
the  article  is  of  the  same  grade,  quality  or  quantity,  or 
to  fix  prices  of  patented  or  unpatented  articles,  or  to  use 
discounts  or  rebates  in  order  to  force  purchasers  or  dealers 
not  to  handle  or  buy  goods  of  competitors,  w^iere  the 
effect  of  such  acts  is  substantially  to  restrain  or  lessen 
competition.  However,  it  specifically  exempts  labor,  ag- 
ricultural, or  horticultural  organizations,  formed  for  the 
purpose  of  mutual  help,  and  not  having  capital  stock  or 
being  conducted  for  profit,  from  the  operation  of  the  anti- 
trust laws. 

It  further  limits  the  scope  of  control  that  a  holding  com- 
pany may  exercise  over  its  subsidiaries  in  that  it  forbids  the 
acquisition  of  the  whole  or  part  of  the  capital  stock  or  share 
of  capital  of  another  corporation  where  the  effect  may  be 
substantially  to  lessen  competition,  to  restrain  commerce 
or  to  create  a  monopoly,  or  where  the  use  of  such  stock  by 
the  voting  or  granting  of  proxies  or  otherwise  may  have  the 
same  effect.  But  these  two  prohibitions  do  not  apply  to 
the  ownership  of  stock  purely  for  purposes  of  investment, 


REGULATION    AND    REFORM  447 

nor  to  the  formation  of  subsidiary  corporations  for  the 
carrying  out  of  the  lawful  purposes  of  the  parent,  or  to 
common  carriers  in  acquiring  feeders  for  their  main  lines 
or  in  acquiring  control  over  non-competing  independent 
lines. 

The  act  also  strikes  at  interlocking  directorates  in  banks, 
banking  associations  or  trust  companies  of  certain  limited 
classes,  namely,  such  as  are  organized  under  the  federal 
banking  acts  and  have  deposits,  capital,  surplus  and  undi- 
vided profits  aggregating  more  than  $5,000,000,  and  pro- 
hibits a  director,  officer  or  employee  of  a  state  bank  of  like 
size  from  becoming  or  being  such  in  a  federal  bank. 

A  similar  provision  against  interlocking  directorates  ap- 
plies to  corporations,  other  than  banks  and  common  car- 
riers, whose  capital,  surplus  and  undivided  profits  aggregate 
more  than  $1,000,000  where  the  effect  would  be  to  eliminate 
competition. 

Misapplication  by  any  president,  director,  officer  or  man- 
ager of  the  funds  of  any  firm,  association  or  corporation 
engaged  in  commerce  as  a  common  carrier  is  made  a 
misdemeanor;  and  common  carriers  are  also  restricted  in 
their  dealings  in  securities,  supplies  or  articles  with  partner- 
ships, firms,  associations  or  corporations  in  which  they  have 
officers  or  directors. 

The  act  grants  the  federal  courts  wide  latitude  in  the 
use  of  temporary  restraining  orders  and  injunctions;  and 
provides,  furthermore,  that  the  acts  of  any  corporation  in 
violation  of  the  anti-trust  laws  are  also  the  acts  of  the 
individual  directors,  officers  or  agents  who  authorize,  order 
or  do  the  acts.  The  usual  penalty  of  a  fine  not  to  ex- 
ceed $5,000  and  imprisonment  for  not  exceeding  one  year 
or  both  in  the  discretion  of  the  court  is  provided  as  a  means 
of  enforcement. 

The  Webb  Act  of  1918.  — During  the  war  it  was  felt 
that  that  application  of  the  Sherman  Law  and  its  amend- 


4^8         OWNERSHIP    ORGANIZATION    ABUSES 

ments  to  goods  exported  to  foreign  countries  was  a  great 
obstacle  to  the  development  of  America's  foreign  trade. 
This  restriction  was  removed  in  1918  by  the  enactment 
of  the  Webb  Bill  by  congress.  Under  this  act  "  goods, 
wares,  or  merchandise  exported,  or  in  the  course  of  being 
exported  from  the  United  States  or  any  Territory  thereof 
to  any  foreign  nation  "  do  not  come  under  the  anti-com- 
bination or  monopoly  restrictions  of  the  anti-trust  laws. 
It  specifically  permits  such  combination  to  be  formed  under 
the  stipulation  that  it  "  shall  file  with  the  Federal  Trade 
Commission  a  verified  statement  setting  forth  the  location 
of  its  offices  or  places  of  business  and  the  names  and  ad- 
dresses of  all  its  officers  and  of  all  its  stockholders  or 
members,  and  if  a  corporation,  a  copy  of  its  certificate  or 
articles  of  incorporation  and  by-laws,  and  if  unincor- 
porated, a  copy  of  its  articles  or  contract  of  association," 
and  thereafter  to  make  a  similar  annual  report  to  the  com- 
mission. The  commission  is  directed  to  see  to  it  that  these 
export  combinations  do  not  sell  goods  within  the  country 
or  in  any  other  way  violate  the  anti-trust  acts. 

Within  a  few  years  hundreds  of  export  combinations  were 
formed  under  the  act  but  with  the  decline  in  the  foreign 
trade  of  the  United  States  many  of  them  have  since  ceased 
to  function. 

The  War  Finance  Corporation  Act.  —  Under  its  war 
powers  Congress  greatly  extended  its  authority  and  control 
over  ownership  organizations.  The  War  Finance  Corpora- 
tion Act,  passed  in  1918,  sought  to  accomplish  two  things. 
First,  it  created  a  corporation  with  a  capital  of  $500,000,000 
for  the  purpose  of  extending  loans  to  industries  that  were 
necessary  to  the  prosecution  of  the  war  and  to  federal 
banks.  It  might  also  issue  bonds  up  to  75  per  cent  of  the 
par  value  of  certain  government  securities  that  it  had 
acquired  as  security  in  support  of  loans.  The  stock  of  this 
corporation  was  all  owned  by  the  United  States  Govern- 


REGULATION    AND    REFORM  449 

ment.  Second,  it  created  a  "  Capital  Issues  Committee  " 
and  provided  "  that  the  Committee  may,  under  rules  and 
regulations  to  be  prescribed  by  it  from  time  to  time,  in- 
vestigate, pass  upon,  and  determine  whether  it  is  com- 
patible with  the  national  interest  that  there  should  be 
sold  or  offered  for  sale  or  for  subscription  any  issue,  or 
any  part  of  any  issue,  of  securities  hereafter  issued  by  any 
person,  firm,  corporation,  or  association,  the  total  or  ag- 
gregate par  or  face  value  of  which  issue  and  any  other 
securities  issued  by  the  same  person,  firm,  corporation,  or 
association  since  the  passage  of  this  Act  is  in  excess  of 
$100,000."  Shares  of  no  par  value  were  to  be  deemed  to 
have  a  par  value  of  $100  each.  Borrowings  in  the  ordinary 
course  of  business,  refunding  or  renewal  of  loans,  resale  of 
certain  classes  of  securities,  securities  issued  by  railroads 
and  bonds  issued  by  the  War  Finance  Corporation  were  ex- 
empt from  the  operation  of  this  part  of  the  act. 

The  act  was  to  continue  in  existence  for  a  period  of  ten 
years,  or  six  months  after  the  end  of  the  war. 

From  this  act  it  is  at  once  seen  that  the  federal  gov- 
ernment may  have  much  greater  power  of  regulation  over 
ownership  organizations  than  it  has  deemed  it  wise  to  ex- 
ercise under  normal  conditions.  But  it  is  open  to  question 
whether  the  broad  powers  of  control  granted  to  the  Capital 
Issues  Committee  as  a  war  measure  would  be  equally  valid 
under  conditions  of  peace. 

Our  Future  Policy 

The  satisfactory  regulation  of  ownership  organizations 
in  business  in  this  country  is  by  no  means  a  simple  and 
easy  problem.  It  is  now  generally  recognized  that  our 
system  of  corporate  organization,  which  constitutes  the 
most  important  element  of  our  ownership  system  is  in  great 
need  of  reform.  Nevertheless,  there  is  great  difference  of 
opinion  as  to  what  should  be  done,  or  how  it  should  be  done 
and  who  should  do  it. 


450         OWNERSHIP    ORGANIZATION    ABUSES 

What  Should  be  Done.  —  In  the  first  place,  it  must  be 
recognized  that  five  distinct  chisses  have  interests  at  stake 
in  this  matter,  and  furthermore,  that  the  interests  of  these 
classes  are  more  or  less  opposed.  They  are  the  pro- 
moters, the  financiers,  the  stockholders,  the  creditors  and 
the  general  public. 

The  promoters  desire  little,  or  no  regulation.  Complete 
freedom  of  action  is  to  their  advantage.  As  a  rule,  they 
are  not  interested  in  the  success  or  failure  of  the  venture 
after  it  has  once  been  established,  for  their  work  stops  at 
that  point.  Consequently,  the  less  there  is  of  regulation 
and  control  the  greater  is  the  opportunity  in  their  profes- 
sion. However,  the  professional  promoters  are  not  numer- 
ous nor  important  as  a  class  and  it  is  very  doubtful  whether 
they  render  a  really  valuable  service  to  modern  business. 

The  financiers,  as  we  have  seen,  play  an  important  role, 
not  only  in  the  formation  and  establishment  of  the  modern 
large  scale  enterprise,  but  also  in  its  subsequent  operation. 
They  are  undoubtedly  a  necessary  adjunct  to  the  system. 
Their  interests  must  be  given  full  consideration.  While 
it  would  seem  that  they  should  desire  conservatism,  ex- 
perience has  proved  that  they  too  frequently  enter  will- 
ingly into  agreements  to  finance  highly  speculative  under- 
takings in  the  hope  of  being  able  to  dispose  of  their  transi- 
tory interests  in  the  enterprise  to  the  investing  public  be- 
fore the  collapse  comes.  They  make  their  largest  profits 
out  of  propositions  of  this  kind,  when  the  underwriting  is 
successful.  Where  it  is  unsuccessful  they  lose  heavily. 
The  history  of  a  number  of  such  failures  has  become  public 
knowledge,  with  the  result  that  the  public,  both  justly  and 
unjustly,  has  placed  the  blame  on  the  Wall  Street's  finan- 
ciers. They  are  being  watched  closely  by  the  public  at 
large  and  this,  no  doubt,  has  tended  to  make  them  some- 
what more  conservative  than  formerly.  Then  too,  they 
are   also   heavily   interested   as   stockholders,   bondholders 


REGULATION    AND    REFORM  451 

and  ultimate  general  creditors  of  the  existing  enterprises 
which  might  suffer  from  new  promotions,  especially  from  the 
speculative  kind.  Thus,  on  the  whole,  it  would  appear 
that  the  best  interests  of  the  financiers  lie  in  a  middle 
course,  namely  moderate  regulation. 

The  stockholders,  in  view  of  the  fact  that  their  interest 
in  the  enterprise  is  essentially  entrepreneurial  in  character, 
naturally  desire  full  protection  in  their  right  of  ownership 
and  a  full  voice  in  the  direction  of  the  business.  They  hold 
merely  an  equitable  interest  in  the  business,  for  the  claims 
of  general  and  preferred  creditors  take  precedence  over 
theirs.  Their  share  in  the  business  decreases  directly  as 
the  creditors'  shares  increase.  It  is,  thus,  no  more  than 
just  that  they  should  insist  upon  a  guarantee  of  full  power 
to  decide  upon  the  issuance  of  mortgage  and  debenture 
bonds.  Furthermore,  there  is  the  question  of  majority  and 
minority  representation  upon  the  board  of  directors.  The 
ordinary  method  of  voting  denies  a  49  per  cent  minority 
even  a  single  place  on  the  board  and  leaves  that  minority 
in  the  position  of  owners  without  a  voice  in  the  manage- 
ment of  the  business.  The  situation  becomes  still  more 
intolerable  where  the  law  permits  the  use  of  unlimited 
proxies  and  of  long-time  voting  trusts.  We  cannot  there- 
fore, be  surprised  at  the  strong  and  insistent  demand  of  the 
stockholders  for  minority  representation,  assurance  of  con- 
trol and  conservatism  in  the  use  of  bonds  and  other  credi- 
tors' instrumentalities  of  organization. 

The  creditors'  interests  demand  a  sound  and  conservative 
policy  not  only  in  the  method  of  administration  but  also 
in  the  formation  and  organization  of  business  enterprises. 
The  extension  of  credit,  in  general,  is  determined  by  a  com- 
plex of  the  three  factors;  character,  ability  and  net  worth. 
The  first  two  of  these  factors  are  essentially  characteristics 
or  qualities  of  natural  persons,  and  thus,  tend  to  lose  their 
importance  in  the  impersonal  forms  or  organization  where 


452         OWNERSHIP    ORGANIZATION    ABUSES 

those  intrusted  with  policies  of  control  and  management  are 
constantly  subject  to  change.  New  stockholders  may  take 
the  place  of  old  and  install  new  directors  whose  policies  are 
unknown.  The  change  may,  thus,  become  detrimental  to 
the  interests  of  creditors  who  extended  credit  to  the  enter- 
prise on  the  strength  of  the  character  and  ability  of  those 
who  were  in  control  at  that  time.  Because  of  the  uncer- 
tainty of  these  two  factors,  the  tendency  has  been  to  rely 
more  upon  the  capital,  or  net  worth,  of  the  concern  as  a 
gauge  of  its  right  to  credit.  The  creditors'  interests  de- 
mand that  the  earnings  of  the  company  be  retained,  or  re- 
invested in  the  business  instead  of  being  distributed  as 
dividends.  In  a  measure  they  run  counter  to  those  of  the 
stockholders,  who  desire  large  dividends.  Conservatism  is 
the  chief  demand  of  the  creditor,  he  wants  regulations  that 
will  prevent  the  quick  change  in  business  policy,  that  will 
prevent  the  mulcting  of  the  business  through  large  divi- 
dends, that  will  insure  the  value  of  the  assets  and  that  will 
prevent  over-capitalization. 

The  general  public's  interests  should  naturally  be  identi- 
cal with  those  regulations  and  conditions  that  will  make  it 
possible  for  industry  to  develop  along  the  most  advanta- 
geous economic  lines.  But  the  public  does  not  always  know 
what  is  best,  and  in  making  up  its  mind  it  appears  to  be 
perfectly  satisfied  to  let  its  legislative  representatives  force 
its  demands  into  a  political,  rather  than  an  economic 
mold.  The  apathy  of  the  public  in  matters  concerning  the 
mode  of  formation,  methods  of  finance,  of  administration 
and  control  of  the  business  ownership  organization  is 
astounding.  This  passive  attitude  is  due,  in  no  small  part, 
to  the  feeling  of  helplessness  that  has  been  engendered  by 
the  fact  that  any  action  seeking  to  attack  the  problem  at 
its  root  must  emanate  from  the  state  governments.  These 
seem  to  be  more  intent  upon  deriving  a  large  revenue  from 
the  sale  of  corporate  charters  than  upon  any  constructive 


REGULATION    AND    REFORM  453 

measures  that  might  prevent  the  flagrant  evils  and  abuses 
now  inherent  in  the  system. 

The  evils  that  are  the  cause  of  complaint  have  been  dis- 
cussed. They  are  more  or  less  clearly  understood;  and 
the  remedy  in  most  cases  is  as  patent  as  the  evil.  The  con- 
flicting interests,  however,  remain  an  obstacle  to  be 
overcome. 

How  it  Should  be  Done.  —  This  is  not  so  much  a  problem 
of  choosing  the  proper  legislative  measures  whereby  the 
evils  are  to  be  corrected,  but  rather  one  of  selecting  a  mode 
of  procedure ;  that  is  to  say,  should  it  be  done  through  regu- 
latory measures  imposed  by  statute  or  should  the  business 
world  be  left  to  work  out  its  own  salvation.  In  other 
words,  should  it  be  through  a  policy  of  government  or  state 
control  or  through  one  of  "  hands  off  "  ? 

The  second  method  has  been  given  a  fair  trial  and  has  not 
proved  to  be  to  the  best  interests  of  the  public  at  least  in 
so  far  as  the  public  is  a  judge  of  what  is  to  its  interests 
and  what  is  not.  It  may,  therefore,  be  dismissed  without 
further  consideration. 

Granting,  then,  that  the  policy  of  government  control 
should  be  continued,  and  perhaps  extended,  we  are  at  once 
confronted  by  the  question  whether  the  several  states  or 
the  United  States  should  exercise  this  control.  Up  to  the 
present  time  it  has  been  very  largely  in  the  hands  of  the 
states,  a  circumstance  that,  in  no  small  measure,  has  been 
responsible  for  the  chaotic  conditions  that  now  exist,  and 
that  will  in  all  probability  continue  so  long  as  the  several 
states  follow  a  policy  of  competitive  laxness  and  latitude. 

Control  by  the  federal  government  seems  to  be  the  only 
real  solution  of  the  problem.  This  may  perhaps  be  best 
accomplished  and  made  most  effective  by  requiring  in- 
corporation under  federal  laws.  This  would,  of  course,  not 
give  the  federal  government  the  power  of  control  over  the 
personal  ownership  organizations  and  unincorporated  as- 


454        OWNERSHIP    ORGANIZATION    ABUSES 

sociations  and  companies,  but  it  would,  nevertheless,  be  a 
great  step  in  advance. 

Federal  Incorporation.  —  It  has  at  various  times  been 
suggested  that  congress,  without  violating  the  United 
States  Constitution,  can  force  federal  incorporation  through 
any  one  or  all  of  the  following  methods: 

(1)  By  excluding  from  the  channels  of  interstate  com- 
merce the  articles  manufactured  or  otherwise  produced  by 
state  corporations. 

(2)  By  prohibiting  all  corporations  not  chartered  by 
congress  from  engaging  in  interstate  commerce. 

(3)  By  laying  a  prohibitive  tax  upon  the  interstate 
business  transacted  by  state-chartered  corporations. 

(4)  By  denying  the  use  of  the  mails  to  state  corpora- 
tions that  engage  in  interstate  commerce. 

There  is  no  doubt  that  the  practicability  as  well  as  the 
constitutionality  of  some  of  these  plans  are  open  to  ques- 
tion. The  first,  third  and  fourth  of  these  plans,  all  involve 
more  or  less  discrimination  and  would  appear  to  come 
under  the  prohibition  of  the  "  due  process  of  law  "  clauses 
contained  in  the  Fifth  and  Fourteenth  Amendments  of  the 
Constitution.  Thus,  it  has  been  held  that  under  these 
clauses  the  law  must  operate  equally  on  all  persons  and  that 
any  classification  adopted  must  be  based  upon  a  reason- 
able ground  of  distinction.  It  cannot  be  a  mere  arbitrary 
selection.*  This  would  leave  the  second  plan  as,  perhaps, 
the  most  feasible. 

Aside  from  these  facts,  all  of  these  plans  are  predicated 

upon  the  federal  government's  power  to  regulate  interstate 

commerce.     One  of  the  broadest  definitions  of  interstate 

commerce  is  that  given  by  Chief  Justice  Marshall  in  his 

decision  in  Gibbons  v.  Ogden  ^  in  which  he  said,  "  The  sub- 

*  Cases  in  point  are:   Giozza  v.  Ticrnan  (1893),  148  U.  S.  657; 
Gulj,  etc.,  Railroad  v.  EUh  (1897),  165  U.  S.  150;  McCray  v.  United 
States  (1904),  195  U.  S.  27. 
5  9  Wheat.  1,  189  (decided  in  1824). 


REGULATION    AND    REFORM  455 

ject  to  be  regulated  is  commerce  and  ...  it  becomes  neces- 
sary to  settle  the  meaning  of  the  word.  The  counsel  of  the 
appellee  would  limit  it  to  buying  or  selling,  or  the  inter- 
change of  commodities.  .  .  .  This  would  restrict  a  general 
term,  applicable  to  many  objects,  to  one  of  its  significa- 
tions. Commerce  undoubtedly  is  traffic,  but  it  is  some- 
thing more  —  it  is  intercourse."  In  further  interpretation 
it  has  been  held  that  it  is  traffic  in  or  transportation  of 
persons,  property  and  ideas.*^  But  on  the  other  hand,  con- 
tracts for  the  issuance  of  insurance  policies  are  not  inter- 
state commerce."  It  is,  therefore,  doubtful  whether  the 
interstate  commerce  clause  would  be  comprehensive  enough 
to  give  the  federal  government  sufficient  power  adequately 
to  control  even  the  more  important  and  larger  business 
organizations  in  the  country. 

However,  in  a  special  message  to  congress,  January  7, 
1910,  in  recommending  additional  legislation  to  control 
trusts,  President  Taft  said: 

"  Generally,  in  the  industrial  combinations  called  '  trusts '  the 
principal  business  is  the  sale  of  goods  in  many  States  and  in 
foreign  markets;  in  other  words,  the  interstate  and  foreign 
commerce  far  exceeds  the  business  done  in  any  one  State.  This 
fact  will  justify  the  Federal  Government  in  granting  a  Federal 
charter  to  such  a  combination  to  make  and  sell  in  interstate  and 
foreign  commerce  the  products  of  useful  manufacture  under  such 
limitation  as  will  secure  a  compliance  with  the  anti-trust  laws. 
It  is  possible  to  frame  a  statute  that  while  it  offers  protection 
to  a  Federal  company  against  harmful,  vexatious,  and  unnecessary 
invasion  by  the  States,  it  shall  subject  it  to  reasonable  taxation 
and  control  by  the  States  with  respect  to  its  purely  local 
business.  .    .    . 

"  Corporations  organized  under  this  act  should  be  prohibited 
from  acquiring  and  holding  stock  in  other  corporations   (except 

^  Covington  Bridge  Co.  v.  Kentucky  (1894),  154  U.  S.  204; 
Hanley  v.  Railroad  Co.  (1903),  187  U.  S.  617,  619;  Telegraph  Co.  v. 
Texas  (1881),  105  U.  S.  460. 

■?  Paul  V.  Virginia  (1868).  3  Wall,  168. 


456         OWNERSHIP    ORGANIZATION    ABUSES 

for  special  reasons,  upon  approval  by  the  proper  Federal  author- 
ity), thus  avoiding  the  creation  under  national  auspices  of  the 
holding  company  with  subordinate  corporations  in  different 
States,  which  has  been  such  an  effective  agency  in  the  creation 
of  the  great  trusts  and  monopolies.  .    .    . 

"  The  drafting  of  such  a  Federal  incorporation  law  would  offer 
ample  opportunity  to  prevent  many  manifest  evils  in  corporate 
management  to-day,  including  irresponsibility  of  control  in  the 
hands  of  the  few  who  are  not  real  owners." 

Judge  Elbert  H.  Gary  set  down  his  ideas  upon  this  sub- 
ject in  a  bill  drafted  by  him  and  submitted  to  the  Senate 
Committee  on  Interstate  Commerce  at  the  request  of  that 
body.*  This  bill  provides  for  federal  control  by  requiring 
every  corporation,  except  conamon  carriers,  to  secure  a 
federal  license  to  do  interstate  business  and  makes  every 
such  corporation  subject  to  the  regulatory  provision  of  the 
bill  so  long  as  it  retains  such  a  license.  Section  7  of  this  bill 
seeks  to  prevent  over-capitalization  and  watered  stock  by 
requiring  as  a  condition  of  the  issuance  of  a  license  that 
"  no  stock  of  said  corporation  was  issued  except  for  cash 
or  for  property  equal  in  value  to  the  par  value  of  the  stock 
thus  issued."  To  enable  the  corporation  commission  pro- 
vided for  in  the  bill  to  ascertain  the  reasonable  value  of 
property  taken  in  exchange  for  stock  the  corporation  was 
required  to  file  with  the  commission  a  written  statement 
signed  and  sworn  to  by  the  majority  of  the  board  of  direc- 
tors setting  forth  "  (a)  A  full  description  of  the  property 
in  payment  for  which  stock  was  issued;  (b)  the  number  of 
shares  issued  in  payment  for  said  property  and  whether 
or  not  such  shares  have  a  par  value,  and  if  so,  the  aggregate 
par  value  of  the  stock  so  issued,  or  if  not,  then  the  number 
of  shares  so  issued;  (c)  the  names  and  addresses  of  the 
vendors  of  the  property  purchased  or  acquired  by  the  cor- 

^  The  bill  is  reprinted  in  full  by  W.  H.  S.  Stevens  in  Indiistrial 
Combinations  and  Trusts,  pp.  548-557. 


REGULATION    AND    REFORM  457 

poration  with  the  stock  so  issued  and  whether  or  not  they, 
or  any  of  them,  were  officers  or  directors  of  the  corpora- 
tion, and  whether  or  not  they,  or  any  of  them,  were,  to  the 
knowledge  of  the  signers  of  the  statement,  owners  in  their 
own  name  or  otherwise  of  any  shares  of  stock  in  the  cor- 
poration, and  if  so,  how  many  of  such  shares;  (d)  the 
terms  of  any  agreement,  verbal  or  written,  for  the  transfer 
of  such  property  to  the  corporation,  and  the  parties  to  all 
such  agreements,  and  particularly  the  amount  paid  as  pur- 
chase money  in  cash  or  shares  for  such  property,  specifying 
any  amount  payable  for  good  will  and  any  and  all  amounts 
paid  to  each  vendor;  and  in  case  any  written  contract  has 
been  made  with  said  vendors,  or  any  of  them,  a  sworn  copy 
thereof  shall  be  filed  with  such  statement;  (e)  in  case  the 
vendors  of  such  property  or  any  of  it,  are  directors  of  the 
corporation  or  owners  of  any  of  its  stock  in  their  own 
names  or  otherwise,  a  statement  of  the  prices  paid  by  them 
for  the  property  so  sold  or  transferred  to  the  corporation 
and  copies  of  all  the  contracts  by  which  the  said  vendors 
acquired  the  ownership  or  the  control  thereof." 

It  provides  further,  that  all  corporations  licensed  under 
the  bill  shall  make  annual  and  special  reports  to  a  cor- 
poration commission,  and  also  gives  this  commission  and 
several  other  government  bodies  full  power  of  investigation 
with  a  view  to  enforcement  of  the  act.  It  is  by  far  the 
most  comprehensive  plan  for  federal  control  that  has  yet 
been  proposed  short  of  an  amendment  of  the  Constitution. 

However,  on  summing  up  the  situation,  one  cannot  but 
come  to  the  conclusion  that  any  federal  control  over  busi- 
ness ownership  organizations  that  can  be  instituted  under 
the  existing  constitutional  provisions  can  be  made  to  apply 
only  to  a  limited  number  of  establishments.  The  only  real 
beginning  to  a  solution  of  the  problem  is  through  amend- 
ment of  the  Constitution,  and  this  should  be  given  a  fair 
trial  before  the  possibility  of  government  control  is  entirely 
discarded. 


PART  VI 

SUPPLEMENTARY   FORMS   AND 
DOCUMENTS 


A.  FORMS  PERTAINING  TO  THE  PARTNERSHIP 

FORM    1. 
PARTNERSHIP  AGREEMENT 

Articles  op  Agreement  made  the  sixteenth  day  of  May 
One  thousand  nine  hundred  and  twenty-one  by  and  between 

John  Jones  of  the  City,  County  and  State  of  New  York, 
hereinafter  called  Jones, 

Thomas  Brown  of  the  Town  of  Montclair,  County  of  Essex, 
State  of  New  Jersey,  hereinafter  called  Brown,  and 

Henry  Robinson  of  the  City,  County  and  State  of  New  York, 
hereinafter  called  Robinson, 

Any  of  whom  is  hereinafter  called  "  partner  "  and  all  of  whom 
together  are  hereinafter  called  "  partners," 

WITNESSETH  as  foUows: 

1.  The  said  parties  above  named  have  agreed  to  become  part- 
ners in  business  and  by  these  presents  do  agree  to  be  partners  to- 
gether under  and  by  the  name  or  firm  of  JONES,  BROWN  & 
ROBINSON,  and  at  the  City,  County  and  State  of  New  York 
to  engage  in  and  carry  on  the  business  of  dealers  in  hardware, 
buying  and  selling  hardware  on  their  own  account  or  on  con- 
signment or  commission  and  generally  to  do  in  the  scope  or  con- 
duct of  the  business  whatever  ordinarily  is  done  by  dealers  in 
hardware. 

2.  The  partnership  shall  begin  on  the  first  day  of  June,  One 
thousand  nine  hundred  and  twenty-one.  To  that  end  and  pur- 
pose they  will  contribute  capital  as  follows: 

Jones  the  sum  of  Ten  thousand  Dollars   ($10,000). 
Brown  the  sum  of  Fifteen  thousand  Dollars  (S15,000). 
Robinson  the  sum  of  Twenty  thousand  Dollars  ($20,000) 

46X 


462  SUPPLEMENTARY    FORMS 

Of  these  contributions  fifty  per  cent  (50%)  shall  be  made  on 
the  day  named  in  this  agreement  for  the  partnership  herein 
provided  for  to  take  effect.  The  remaining  fifty  per  cent  (50%) 
shall  be  made  on  the  fifteenth  day  of  July,  One  thousand  nine 
hundred  and  twenty-one.  The  capital  so  contributed  shall  be 
used  and  employed  in  common  by  and  between  the  partners  as 
provided  in  this  agreement,  and  generally  for  the  support  and 
management  of  the  partnership  business  to  the  mutual  benefit 
and  advantage  of  the  partners. 

3.  All  gains,  profits  and  increases  that  shall  come,  grow  or 
arise  from  or  by  means  of  the  partnership  business,  and  herein- 
after, of  whatever  nature,  in  this  agreement  called  "  profits " 
shall  be  diAided  among  the  partners  in  the  following  manner: 

(a)  The  profits  of  the  business  shall  be  considered  for  the 
purpose  of  computing  the  division  and  distribution  agreed  on 
as  of  two  classes.  One  class  shall  be  that  share  of  the  profits 
to  which  the  partners  are  entitled  irrespective  of  their  contribu- 
tions to  capital.  This  share  is  designated  in  this  agreement 
as  "  profits  of  the  first  division."  The  other  class  shall  be  that 
share  of  the  profits  to  which  the  partners  are  entitled  by  reason 
of  their  contribution  of  capital  to  the  partnership  business.  This 
share  last  described  is  designated  in  this  agreement  as  "  profits 
of  the  second  division." 

(b)  The  shares  of  profits  of  the  first  division  shall  be  computed 
as  the  following  percentages  of  the  total  profits  of  the  partner- 
ship business:  Jones,  thirty  per  cent  (30%),  Brown  twenty  per 
cent  (20%),  Robinson,  fifteen  per  cent  (15%). 

(c)  Of  the  remaining  thirty-five  per  cent  of  the  total  profits 
of  the  partnership  business  comprising  "  profits  of  the  second 
division  "  the  share  of  each  partner  shall  he  computed,  divided 
and  distributed  in  proportion  to  the  amount  of  capital  each 
partner  has  contributed. 

4.  As  among  the  partners  losses  shall  bo  liorno  in  proportion 
to  the  capital  contril~)Uted.  IjOsscs  shall  bo  paid  out  of  capital, 
but  shall  l)e  made  good  out  of  sul)sequcnt  profits  of  the  partner- 
ship business  before  there  shall  be  nny  accounting  for  profits 
to  the  partners.  If  at  any  time  the  capital  is  entirely  exhausted 
in  the  payment  of  losses  the  partners  shall  be  liable  as  to  each 


PARTNERSHIP    FORMS  463 

other  in  proportion  to  the  total  share  of  the  profits,  inchicling 
profits  of  both  divisions  to  which  they  are  entitled. 

5.  Each  partner  shall  be  entitled  to  draw  through  the  year 
Three  hundred  and  fifty  Dollars  on  the  last  day  of  each  month 
on  his  personal  account  and  no  more,  and  shall  be  entitled  to 
withdraw  this  sum  so  long  as  this  agreement  shall  continue 
whether  or  not  the  business  shows  a  profit. 

6.  On  the  death  of  any  partner  the  surviving  partners  shall 
exhibit  a  statement  of  accounts  as  of  the  date  of  the  deceased 
partner's  death  to  the  legal  representative  of  the  deceased  as 
soon  as  practicable,  but  shall  not  be  compelled  to  make  any 
payment  or  an  accounting  for  a  period  of  eighteen  months  from 
such  decease.  The  surviving  partners  may,  however,  at  any  time 
pay  to  such  legal  representative  all  or  any  part  of  the  deceased 
partner's  share.  So  long  as  any  of  the  capital  of  the  deceased 
partner  shall  remain  in  the  business  his  legal  representative  shall 
be  entitled  to  profits  of  the  second  division  in  proportion  to  the 
deceased  partner's  capital  remaining  in  the  business. 

7.  Representatives  of  a  deceased  partner  shall  not  be  entitled 
to  any  compensation  or  accounting  for  good-will,  but  surviving 
partners  shall  be  entitled  to  the  benefit  of  all  the  good-will  of  the 
business  as  of  their  own  right.  Surviving  partners  shall  have  a 
right,  subject  to  and  in  accordance  with  the  laws  of  the  State  of 
New  York  without  compensation,  to  continue  the  name  of  a 
deceased  partner  as  part  of  a  firm  name. 

8.  It  is  agreed  by  and  between  the  parties  hereto  that  there 
shall  be  kept  at  all  times  during  the  continuance  of  this  agree- 
ment at  the  office  of  the  partnership  perfect,  just  and  true  books 
of  account  wherein  the  partners  shall  enter  and  set  down  the 
capital  contributed  and  withdrawn,  all  money  by  them  received, 
paid,  laid  out  and  expended  in  and  about  the  business  of  the 
partnership,  goods,  wares  and  merchandise  by  them  or  any  of 
them  bought  or  sold,  either  for  the  account  of  the  partnership  or 
on  consignment  or  commission,  and  all  other  matters  and  things 
whatsoever  to  the  business  and  the  management  thereof  in  any 
wise  belonging.  Said  books  shall  be  used  in  common  among  the 
said  partners,  so  that  any  of  them  may  have  access  thereto  with- 
out any  interruption  or  hindrance  of  any  other. 


464  SUPPLEMENTARY    FORMS 

9.  The  partners  once  each  year,  as  of  the  thirty-first  of  Deceni' 
ber,  and  as  soon  thereafter  as  reasonably  practicable,  shall  make, 
yield  and  render  each  to  the  other  a  true,  just  and  perfect  in- 
ventory and  account  of  all  profits  and  increases  by  them  or  any 
of  them  made  and  of  all  losses  by  them  or  any  of  them  sustained; 
and  also  all  payments,  receipts,  disbursements,  and  all  other 
things  by  them  made,  received,  disbursed,  acted,  done  or  suffered 
in  the  partnership  and  business.  When  this  account  is  made  they 
shall  and  will  clear,  adjust,  pay  and  deliver,  each  to  the  other,  at 
the  time,  their  just  share  of  the  profits,  and  pay  and  bear  their 
just  share  of  the  expenses  and  losses  so  made  as  aforesaid.  Further 
at  the  request  of  any  partner  such  an  accounting  shall  be  made  as 
of  the  thirty-first  day  of  any  March  (March  31st)  or  the  thirtieth 
day  of  June  or  September  during  the  continuance  of  the  partner- 
ship hereunder,  and  as  soon  thereafter  as  practicable;  but  on 
such  an  accounting  no  partner  shall  be  entitled  to  the  payment 
of  any  profits,  nor  so  long  as  the  partnership  is  solvent  shall  be 
called  on  to  pay  into  the  partnership  his  share  of  the  expenses 
and  losses.  The  representatives  of  a  deceased  partner,  however, 
on  calling  for  such  an  accounting  may,  as  in  this  agreement 
above  provided,  withdraw  the  proportion  of  the  capital  to  w^hich 
they  are  entitled. 

10.  At  all  times  during  the  continuance  of  their  partnership 
the  partners  and  each  of  them  will  not  engage  in  any  other 
business,  but  will  give  their  attendance,  and  will  use  their 
and  each  of  their  best  endeavors,  and  to  the  utmost  of  their  skill 
and  power  exert  themselves  for  their  joint  interest,  profit,  benefit 
and  advantage  and  will  truly  employ  their  joint  capital,  and, 
until  it  is  paid  out  on  an  accounting,  the  increase  thereof,  in  the 
business  aforesaid.  No  partner  shall  accept  any  office  or  employ- 
ment, whether  honorary  or  remunerative,  without  consulting  the 
other  partners  or  so  many  of  them  as  may  be  reasonably  avail- 
able, and  shall  not  accept  it  against  the  will  of  half  or  a  majority 
of  the  partners. 

11.  All  partners  shall  have  an  equal  voice  in  the  management 
of  the  business,  but  each  partner  so  far  as  is  possible  and  as  is 
reasonable  in  the  interests  of  the  business  shall  consult  the  other 
partners.    Especially  no  partner  shall   commit  the  partnership 


PARTNERSHIP    FORMS  465 

to  any  transaction  on  its  own  account  exceeding  an  amount  of 
$2,000  without  consulting  all  the  partners  who  may  be  reasonably 
available  for  consultation  either  personally  or  by  communication 
by  mail,  telegraph  or  telephone;  and  such  opportunity  for  con- 
sideration as  may  be  consistent  with  the  nature  of  the  transaction 
shall  be  given.  No  such  transaction  shall  be  entered  into  unless 
all  the  partners  who  are  reasonably  available  are  unanimously  in 
favor  of  it.  In  event  of  a  disagreement  among  the  partners  as 
to  any  other  transaction  or  business  the  will  of  the  majority,  or 
of  the  majority  of  those  reasonably  available  for  its  con- 
sideration, shall  prevail,  and  in  the  event  that  the  partners 
available  are  equally  divided  the  transaction  shall  not  be  entered 
into  or  the  business  undertaken  or  the  change  made. 

12.  No  partner  shall  on  his  own  account  speculate  in 
or  in  any  way  purchase  stocks  or  other  securities  or 
commodities  on  a  margin.  And  the  parties  hereby  also 
mutually  covenant  and  agree  to  and  with  each  other  that  during 
the  continuance  of  the  partnership  none  of  them  shall  or  will 
indorse  any  note,  or  otherwise  in  any  way  become  guarantor 
or  surety  for  any  person,  persons,  partnership,  association  or 
corporation  whomsoever  or  whatsoever.  Each  partner  shall  at 
all  times  duly  and  punctually  pay  and  discharge  his  separate 
and  private  debts  and  engagements,  whether  present  or  future, 
and  keep  indemnified  therefrom,  and  from  all  actions,  proceedings, 
costs,  claims  and  demands  in  respect  thereof,  the  partnership 
property  and  the  other  partners. 

13.  On  the  termination  of  this  partnership  the  partners,  each 
to  the  other,  shall  and  will  make  a  true,  just  and  final  account 
of  all  things  relating  to  their  business  as  partners,  and  in  all 
things  make  a  true  adjustment  in  accordance  with  the  terms  of 
this  agreement. 

In  Witness  Whereof,  the  parties  hereto  have,  at  the  City, 
County  and  State  of  New  York,  hereunto  set  their  hands  and 
seals,  the  day  and  year  first  above  written. 

In  the  presence  of: 

James  Blackman  John  Jones 

Thomas  Brown 
Henry  Robinson 


466  SUPPLEMENTARY    FORMS 

FORM    2. 

NOTICE   OF  DISSOLUTION   OF  PARTNERSHIP 

Notice  is  hereby  given  that  the  partnership  subsisting  beween 
Adam  Jones,  Special  Partner,  Aljred  Brown  and  Henry  Miller. 
General  Partners,  under  the  firm  name  of  Adam  Jones  &  Com- 
pany was  this  day  dissolved. 

(Dated)  (Signatures  of  Partners)  Adam  Jones 

Alfred  Brown 

Henry  Miller 

The  notice  of  dissolution  is  frequently  accompanied  by 
an  affidavit  by  a  notary  public,  such  as  the  following: 

STATE,  CITY  AND  COUNTY  OF  NEW  YORK,  SS: 

On  this day  of 1921,  before  me  personally  appeared 

(names  of  partners),  to  me  known  and  known  to  me  to  be  the 
individuals  described  in  and  who  executed  the  foregoing  instru- 
ment, and  they  duly  acknowledge  to  me  that  they  executed  the 
same. 

Notary  Public. 


FORM    3. 

NOTICE  OF  A  PARTNER'S  WITHDRAWAL 

Notice  is  hereby  given  that on  the. . .  .day  of , 

withdrew  from  the  partnership  existing  between and 

under  the  firm  name  of  All  debts  due  to  said 

partnership  and  those  due  by  thom  have  been  assumed  by  the 
remaining  partners,  who  will  continue  the  business  under  the  firm 
name  of 

(Dated)  (Signatures  of  Partners) 


SECURITIES-ISSUING    ORGANIZATIONS     467 

B.    FORMS    PERTAINING    TO    SECURITIES- 
ISSUING    ORGANIZATIONS 

1.     THE  JOINT  STOCK  COMPANY 

The  forms  and  documents  pertaining  to  the  organization 
and  operation  of  the  joint  stock  company  are  fully  as 
numerous  and  varied  as  those  that  pertain  to  the  corpora- 
tion. However,  for  the  most  part  they  resemble  the  cor- 
porate forms  so  closely  that  it  would  result  in  a  great  deal  of 
duplication  to  reproduce  them  here.  For  this  reason  the 
specimens  are  confined  to  a  single  copy  of  articles  of 
association. 

FORM  4. 

ARTICLES  OF  THE  PIERCE  FORDYCE  OIL  ASSOCIATION 

A  Joint-Stock  Association 

Articles  of  Copartnership 

Name. 

We,  whose  names  are  hereto  subscribed,  do  hereby  form  a 
Copartnership  Association,  to  be  known  and  styled 

Pierce  Fordyce  Oil  Association, 

which  shall  continue  in  existence  until  the  2d  day  of  April,  1960, 
unless  sooner  dissolved  as  herein  provided. 

Purposes. 

The  general  purpose  of  said  Copartnership  Association  is:  To 
engage  in  the  general  merchandise  of  petroleum  and  the  products 
thereof  and  other  such  articles  as  may  be  advantageously  sold  or 
handled  in  connection  therewith;  to  purchase,  own  and  mine  lands 
supposed  to  contain  or  containing  oils  or  other  minerals  and  to 


468  SUPPLEMENTARY    FORMS 

construct  and  operate  refineries  or  other  manufacturing  plants 
for  refining  or  reducing  such  oils  or  minerals  and  to  engage  in 
any  other  industrial,  manufacturing,  mining  or  merchandising 
enterprise  or  exploitation  that  may  be  determined  by  the  board 
of  managers  appointed  or  chosen  as  hereinafter  provided. 

Capital. 

The  capital  is  three  million  dollars,  divided  into  thirty  thou- 
sand shares  of  one  hundred  dollars  each,  all  of  which  has  been 
paid  in,  by  the  subscribers  hereto.  The  capital  may  be  increased 
from  time  to  time  by  increasing  the  number  of  shares  and  the 
admission  of  new  members,  as  may  be  determined  by  a  vote  of 
the  majority  of  the  then  shares  at  any  meeting  of  the  share- 
holders called  pursuant  to  these  articles  of  association  or  such 
by-laws  as  may  be  adopted  hereafter  by  a  majority  of  the  shares. 

Shares. 

The  certificates  of  membership  shall  be  issued  by  the  president 
of  the  board  of  managers  and  countersigned  by  the  secretary  of 
said  board  and  shall  be  substantially  the  following  form,  viz.: 

Pierce  Fordyce  Oil  Association, 
(Copartnership.) 
Capital,  $3,000,000,  or  thirty  thousand  shares. 

Member's  Certificate  of  Interest. 

This  is  to  certify  that is  the  owner  of full 

paid  share  of  beneficial  interest  in  the  Pierce  Fordyce  Oil 
Association,  transferable  on  the  books  of  the  association  by  the 
owner  thereof  in  person  or  by  duly  atithorized  attorney  upon 
surrender  of  this  certificate  properly  indorsed. 

This  certificate  of  interest  is  subject  to  the  provisions  and 
covenants  contained  in  the  articles  of  copartnership  of  the 
Pierce  Fordyce  Oil  Association,  dated  the  2d  day  of  April,  1910, 
and  any  amendment  thereto  and  the  by-laws  of  said  association 


SECURITIES-ISSUING    ORGANIZATIONS     469 

and  the  provisions  hereof.  No  member  of  said  association  or 
owner  or  holder  of  this  certificate  shall  have  any  authority,  power 
or  right  whatsoever  to  do  or  transact  any  business  whatever  for, 
on  behalf  of  or  binding  on  the  association  or  any  member  thereof, 
and  no  member  of  this  association  shall  be  liable  for  any  debts, 
covenants,  demands  or  torts  of  this  association  beyond  the  amount 
of  his  shares. 

This  certificate  shall  be  the  sole  and  only  evidence  of  member- 
ship in  said  association  and  shall  be  surrendered  upon  the  call 
of  the  board  of  governors  at  any  time  to  the  association  upon  the 
payment  or  tender  of  payment  to  the  amount  of  its  face  or  par 
value  and  a  premium  of  fifteen  per  cent  thereof. 

In  WITNESS  WHEREOF,  the  said  association  has  caused 
this  certificate  to  be  signed  by  its  duly  authorized  officers  and  to 

be  sealed  with  the  seal  of  the  association  this. . .  .day  of , 

19 


Secretary.  President. 

Death  of  Member 

The  decease  or  insolvency  of  a  member  of  the  association  shall 
not  work  a  dissolution  of  it  or  have  any  effect  upon  the  same, 
its  operation  or  mode  of  business;  nor  shall  it  entitle  his  legal 
representatives  or  heirs  or  assigns,  voluntary  or  involuntary,  to 
any  account  or  to  take  any  action  in  law  or  equity  or  otherwise 
against  the  association,  its  members,  officers,  board  of  governors, 
trustees  or  its  property  or  assets;  but  they  shall  simply  and 
only  succeed  to  the  right  of  the  deceased,  to  the  certificate  of 
membership  and  the  shares  it  represents,  subject  to  this  agree- 
ment, the  amendments  thereto  and  the  by-laws  of  the  association, 
now  or  hereafter  adopted. 

Board  of  Governors 

The  entire  affairs  of  this  association  shall  be  managed  by  a 
board  of  governors,  consisting  of  seven  members,  each  of  whom 
shall  own  at  least  a  certificate  or  certificates  for  not  less  than 


470  SUPPLEMENTARY    FORMS 

ten  shares,  who  shall  be  elected  by  a  majority  of  shares  held  by 
members  at  a  regular  annual  meeting  of  the  certificate  holders 
every  two  years  after  the  expiration  of  the  term  of  the  first 
board  of  governors. 

The  first  board  of  governors  shall  be  composed  of  the  following 
named  persons,  viz :  H.  C.  Pierce,  Samuel  W.  Fordyce,  Samuel  W. 
Fordyce,  Jr.,  George  T.  Priest,  Robert  E.  Moloney,  Henry  W. 
Allen,  and  John  H.  HoUiday,  who  shall  continue  for  the  period 
of  five  years  next  ensuing  the  date  of  this  agreement. 

Each  board  shall  elect  its  own  president,  vice-president,  secre- 
tary and  treasurer  and  may  create  such  other  offices,  filling  them 
by  appointments  and  prescribing  the  duties  appertaining  thereto 
as  they  may  deem  wise,  necessary  or  convenient  to  carry  on  the 
business  of  the  association  and  may  likewise  fill  any  vacancy  in 
its  membership  occasioned  by  death  or  resignation  until  the  next 
election  of  a  board  of  governors.  The  board  may  also  fix  the 
salaries  of  all  officers,  including  its  own  members,  and  may  re- 
move any  officer  and  fill  all  vacancies  which  may  occur  in  any 
office. 

The  first  board  of  governors  shall  appoint  such  a  number  of 
its  members  as  it  may  deem  proper,  not  exceeding  three,  as 
trustees,  in  whose  name  or  names  all  investments  and  title  to  all 
property  are  to  be  made  and  held  under  a  declaration  of  trust 
for  and  on  behalf  of  this  association. 

The  board  of  governors  shall  be  held  to  be  trustees  for  and  on 
behalf  of  this  association,  and  may  in  that  capacity  sue  and  be 
sued  in  any  court  of  law  or  equity. 

The  board  of  governors  shall  have  full  power  and  authority  in 
the  conduct  of  the  business  of  the  association  to  borrow  money 
and  issue  mortgage  debentures  therefor  if  deemed  advisable, 
and  any  debt  for  money  so  borrowed  or  liability  created  shall  be 
and  remain  until  paid  a  lien  upon  all  funds,  moneys  and 
properties  there  or  thereafter  belonging  to  or  held  in  trust  for 
this  association  in  preference  to  the  claims  or  claim  of  any 
shareholder  as  such. 

(1)  The  board  of  governors  shall  have  no  power  to  bind 
the  shareholders  or  members  personally;  and  in  every  written 
contract  or  undertaking  they  shall  enter  into   relating  to   the 


SECURITIES-ISSUING    ORGANIZATIONS     471 

business  cf  this  association,  its  property  or  any  part  thereof, 
reference  shall  be  made  to  this  agreement;  and  the  person,  firm 
or  corporation  so  contracting  with  the  board  of  governors  shall 
look  only  to  the  funds  and  property,  legal  and  equitable,  of  this 
association  for  the  payment  of  any  debt,  damage,  judgment  or 
decree  or  of  any  money  that  may  become  due  and  payable  in 
any  way  by  reason  of  the  contract  or  undertaking;  and  neither 
the  board  of  governors  nor  the  shareholders  or  members  present 
or  future  shall  be  personally  liable  therefor  or  for  any  debt  in- 
curred or  engagement  or  contract  made  by  said  board  of 
governors. 

(2)  The  board  of  governors  may  fix  and  regulate  their  own 
time  and  place  of  meeting  and  a  majority  thereof  shall  con- 
stitute a  quorum  and  possess  and  exercise  all  the  powers  of  a 
full  board. 

(3)  The  board  of  governors  shall,  whenever  they  may  be  so 
minded,  convene  all  the  registered  share  or  certificate  holders  in 
general  meeting  without  specifying  the  purpose  thereof  upon 
notice  to  that  effect  deposited  in  the  post  office  at  the  place  of 
the  general  offices  of  the  association  addressed  to  each  share- 
holder at  his  registered  post  office  address,  ten  days  before  the 
date  of  the  proposed  meeting;  and  the  majority  of  the  shares 
present  or  represented  at  any  such  meeting  so  called,  shall  have 
and  exercise  the  right,  power  and  authority  of  the  entire  body 
of  share  or  certificate  holders. 

(4)  The  share  or  certificate  holders  shall  meet  annually  on 
the  second  Tuesday  of  each  year  without  further  notice  to  con- 
sider the  affairs  of  the  association  and  transact  such  business 
as  may  then  be  inaugurated  by  them  or  that  may  be  submitted 
for  their  consideration  by  the  board  of  governors.  At  each 
meeting  of  the  share  or  certificate  holders,  each  member  present 
or  represented  by  duly  accredited  agent  or  attorney  shall  be 
entitled  to  cast  as  many  votes  upon  any  proposition  as  he  may 
have  shares  of  membership  interest. 

(5)  At  any  meeting  of  members,  by-laws  may  be  passed 
or  amended  by  a  majority  of  those  present  or  represented;  and 
any  amendment  may  be  made  to  this  agreement  by  a  vote  oi 
three-fourths  of  those  present  or  represented. 


472  SUPPLEMENTARY    FORMS 

(6)  The  board  of  governors  may  from  time  to  time  declare 
and  pay  such  dividends  from  the  earnings  of  the  association  as 
they  deem  expedient. 

Officers  and  their  Duties 

President  and  Vice-President 
The  president,  or  in  his  absence  the  vice-president,  shall  sign 
all  certificates  of  membership,  preside  at  all  meetings  of  the 
members  of  the  board  of  governors  and  shall  do  and  perform 
and  render  such  acts  and  services  as  the  board  of  governors 
shall  prescribe  and  require  and  shall  receive  such  compensation 
for  services  as  may  from  time  to  time  be  fixed  upon  by  the 
board  of  governors. 

Secretary 

The  secretary  shall  countersign  all  certificates  of  membership 
and  shall  keep  such  minutes,  records  and  books  as  the  board  of 
governors  may  require,  attend  all  meetings  of  the  board  of 
governors  and  render  such  services  as  may  be  imposed  upon  him. 

Treasurer 

The  treasurer  shall  perform  such  duties  as  the  board  of 
governors  may  impose  upon  him. 

Title  Trustees 

The  members  of  the  board  of  governors  appointed  to  hold 
the  title  to  all  property  of  the  association  shall  at  all  times  be 
subject  to  the  orders  of  the  board  of  governors  who  may  at  any 
time  and  for  any  cause  remove  any  or  all  of  them  from  office 
and  appoint  and  devolve  upon  other  members  of  the  board  of 
governors  the  duties  and  functions  of  the  office.  In  the  case  of  the 
death,  resignation  or  other  disability  of  any  such  trustee,  the 
board  of  governors  may  fill  the  vacancy  caused  thereby. 

This  association  shall  continue  for  a  period  of  fifty  years  from 
the  date  of  the  execution  hereof  unless  sooner  dissolved  by  the 
vote  of  the  majority  of  membership  certificates  or  shares. 


SECURITIES-ISSUING    ORGANIZATIONS     473 

IN  WITNESS  WHEREOF,  we  have  hereunto  set  our 
respective  signatures  and  attached  our  several  seals  this 
the day  of  April,  19 

Henry  C.  Pierce,  (Seal). 

S.  W.  FoRDYCE,  (Seal). 
Samuel  W.  Fordyce,  Jr.,      (Seal). 

George  T.  Priest,  (Seal). 

RoBT.  E.  Moloney,  (Seal). 

Henry  W.  Allen,  (Seal). 

John  H.  Holliday,  (Seal) . 


2.     THE   CORPORATION 

While  the  forms  and  documents  used  in  organizing  and 
operating  the  corporation  exhibit  almost  an  infinite  varia- 
tion, nevertheless,  there  are  many  forms  that  have  become 
more  or  less  standardized.  In  the  selection  of  the  forms  that 
follow,  care  has  been  taken  to  avoid  any  peculiar  or  ex- 
ceptional technical  requirements. 

Contract  to  Form  a  Corporation.  —  The  contract  be- 
tween the  incorporators  is  in  the  nature  of  a  partnership 
agreement,  and  the  status  of  the  incorporators  is  that  of 
partners  until  the  purposes  of  the  contract  are  fulfilled. 


FORM  5. 
GENERAL  CONTRACT  TO  FORM  A  CORPORATION  i 

(state   of   ILLINOIS) 

This  agreement  made  this  first  day  of  November,  ad.,  1909, 
by  and  between  the  undersigned,  John  Brown,  William  Burbank, 
Edward  Cunningham,  and  Raymond  Williams,  all  of  the  city  of 
Chicago  and  state  of  lUinois. 

1  From  Frank's  Science  of  Organization  and  Business  Develop- 
ment. 


474  SUPPLEMENTARY    FORMS 

Witnesseth,  That  in  consideration  of  the  mutual  undertakings 
and  agreements  of  the  parties  hereto,  as  hereinafter  set  forth,  and 
in  further  consideration  of  the  sum  of  one  dollar  by  each  of  the 
said  parties  to  the  other  in  hand  paid  (at  the  time  of  the  execu- 
tion hereof),  the  receipt  of  which  is  hereby  severally  acknowl- 
edged, the  said  parties  to  this  contract  hereby  agree  by  and 
among  themselves  and  with  each  other  as  follows,  to  wit: 

First,  that  a  corporation  shall  be  formed  by  us  under  the  laws 
of  Illinois  substantially  as  follows: 

(a)  The  name  thereof  to  be  the  Perfect  Automobile  Company. 

(6)  The  capital  stock  of  said  corporation  to  be  One  Hundred 
Thousand  ($100,000)  Dollars,  divided  into  one  thousand  (1,000) 
shares  of  One  Hundred  ($100.00)  Dollars  each,  said  stock  to  be 
all  Common  Stock  of  uniform  character  and  usual  form. 

(c)  The  purpose  of  said  corporation  to  be  substantially  for  the 
manufacture  and  sale  of  automobiles  and  their  parts. 

(d)  Said  corporation  shall  have  a  Board  of  Directors  con- 
sisting of  five  in  number,  who  shall  all  be  stockholders  of  record 
at  the  time  of  their  election. 

(e)  The  officers  of  said  corporation  shall  be  a  President,  Vice- 
President,  Secretary,  Treasurer,  and  General  Manager. 

(/)  The  location  of  the  principal  office  to  be  at  Chicago. 

(g)  The  duration  of  said  corporation  to  be  99  years. 

Second,  we  hereby  agree  with  each  other,  and  the  one  with  the 
other,  that  we  will  take  the  number  of  shares  of  the  capital  stock 
of  said  corporation  set  opposite  our  respective  names  hereunto 
subscribed,  and  will  pay  to  the  commissioners  duly  appointed  by 
the  Secretary  of  State  of  Illinois  in  that  behalf,  fifty  (50%)  per 
cent  of  the  par  value  of  the  said  shares  so  subscribed  by  us  re- 
spectively at  the  time  of  holding  the  first  meeting  of  the  said 
subscribers  to  elect  a  Board  of  Directors  for  said  corporation; 
and  we  further  agree  to  pay  the  balance  of  our  said  subscriptions 
whenever  called  upon  so  to  do  by  the  Board  of  Directors  of 
said  corporation  after  the  same  shall  be  formed. 

Third,  we  further  nominate,  constitute,  and  appoint 

as  our  agent  (or  attorney),  and  the  agent  (or  attorney)  of  the 
said  corporation  so  to  be  formed,  to  create  or  cause  to  be  created 
the  said  corporation  in  accordance  with  the  laws  of  Illinois  and 


SECURITIES-ISSUING    ORGANIZATIONS     475 

this  agreement,  and  to  do  and  perform  all  things  necessary  to 
bring  said  corporation  into  legal  existence;  and  we  further 
authorize  and  empower  our  said  agent  (or  attorney)  to  draw  on 
the  funds  in  the  hands  of  the  legally  constituted  officers  or  agents 
of  said  corporation,  for  the  necessary  expenses  attending  such 
incorporation,  and  we  further  agree  that  any  and  all  contracts 
which  our  said  agent  (or  attorney)  may  make  in  such  matter 
shall  be  binding  upon  said  corporation  and  also  upon  us  jointly 
and  severally. 

In  witness  whereof,  we,  the  undersigned,  hereby  severally  bind 
ourselves,  our  heirs,  executors,  and  administrators. 


Names 


Addresses 


Shares 


Amount 


Option  Agreements.  —  Option  agreements  are  employed 
when  the  corporation  to  be  formed  is  to  take  over  certain 
properties  or  businesses  in  order  to  hold  such  properties,  etc., 
until  the  corporation  can  be  fully  organized  and  act  for 
itself.  The  agreements  are  usually  executed  between  the 
owners  of  the  properties  as  vendors  and  one  of  the  incor- 
porators of  their  agent  or  a  promoter  as  vendee.  The  pay- 
ment made  to  secure  the  option  is  usually  forfeited  in 
case  the  option  fails. 


476  SUPPLEMENTARY    FORMS 

FORM  6 
OPTION  ON  BUSINESS  AND  PROPERTY 

An  agreement  entered  into  this  ISth  day  of  April,  1916,  by 
and  between  the  Ellsworth  Wagon  Company,  a  corporation  duly 
organized  under  the  laws  of  the  State  of  lUinois,  party  of  the 
first  part,  and  William  F.  Mead  of  Chicago,  party  of  the  second 
part. 

For  and  in  consideration  of  the  sum  of  One  Dollar  paid  said 
party  of  the  first  part  by  the  party  of  the  second  part,  receipt 
whereof  is  hereby  acknowledged,  and  for  other  goods  and  valu- 
able considerations,  said  party  of  the  first  part  does  hereby 
agree  to  sell  to  the  said  party  of  the  second  part,  as  a  going 
concern,  its  entire  business,  factories  and  plant  for  the  manu- 
facture and  sale  of  wagons,  owned  and  operated  by  said  party 
of  the  first  part  in  the  city  of  Chicago,  Cook  County,  State  of 
Illinois,  including  therewith  all  machinery,  tools,  and  other 
property  and  appurtenances  thereunto  belonging,  including  all 
raw  materials,  manufactured  products  on  hand,  and  all  contracts 
relating  to  the  purchase  and  sale  of  such  materials  and  products; 
and  also  the  good-will  of  said  business  and  all  trade-marks,  brands, 
patent  rights,  licenses,  etc.,  used  therein  and  controlled  by  said 
party  of  the  first  part;  excepting  only  moneys  and  bills  and 
accounts  receivable  on  hand  at  the  time  of  sale;  all  of  such 
property  to  be  delivered  free  and  clear  from  all  liens,  charges, 
encumbrances,  taxes  and  assessments. 

The  price  to  be  paid  for  said  property  shall  be  an  amount 
Ten  Thousand  Dollars  ($10,000)  in  excess  of  the  actual  appraised 
value  at  the  time  of  purchase,  of  said  real  and  personal  property, 
exclusive  of  good-will,  as  above  set  forth,  and  such  amount  shall 
be  paid  in  cash  at  the  time  of  transfer. 

This  option  shall  expire  and  be  of  no  further  effect  on  and 
after  the  30th  day  of  September,  1916,  unless  prior  thereto  said 
party  of  the  second  part,  or  his  assigns  shall,  in  writing,  notify 
said  party  of  the  first  part  of  his  or  their  intention  to  exercise 
the  same,  and  shall  at  that  time  deposit  in  the  First  National 


SECURITIES-ISSUING    ORGANIZATIONS     477 

Bank  of  Chicago,  Ten  Thousand  Dollars  ($10,000)  in  cash  as  a 
guarantee  of  good  faith  and  to  apply  upon  the  purchase  of  said 
property,  and  within  such  event  the  party  of  the  first  part  shall 
within  sixty  days  of  such  notice  and  deposit,  transfer  and  convey 
said  business  and  property  by  such  deeds,  conveyances,  and 
assignments  and  other  instruments  as  may  be  necessary  to  vest 
second  part  assumes  no  responsibility  to  purchase  said  property 
in  said  party  of  the  second  part  or  his  assigns. 

It  is  further  understood  and  agreed  that  said  party  of  the 
second  part  assumes  no  responsibility  to  purchase  said  property 
unless  he  or  his  assigns  shall  elect  so  to  do  by  written  notice  and 
deposit  in  bank  as  afore  provided,  and  that  in  case  of  assign- 
ment of  this  present  instrument  by  said  party  of  the  second  part, 
all  its  provisions  shall  inure  to  the  benefit  of,  and  run  in  favor  of, 
and  be  binding  upon  his  assignee  or  assignees  in  every  respect 
as  heretofore  upon  said  party  of  the  second  part,  and  in  case  of 
such  assignment  said  party  of  the  second  part  shall  be  free  from 
all  liability  hereunder. 

In  case  of  disagreement  as  to  terms  of  this  option  or  as  to 
any  matters  connected  with  the  exercise  thereof,  each  party 
hereunto  shall  appoint  an  arbiter  and  the  two  so  appointed  shall 
appoint  a  third,  and  the  three  arbiters  so  selected  shall  be  em- 
powered to  decide  finally  all  matters  of  disagreement. 

(Here  follow  the  corporate  signatures  and  the  signature  of  the 
party  of  the  second  part.) 

Option  on  Stock.  —  When  a  corporation  whose  stock  is 
closely  held  by  but  a  few  persons  is  to  be  sold,  the  option 
is  frequently  for  the  purchase  of  the  stock  rather  than  the 
property  of  the  corporation.  If  the  purchase  is  made 
on  behalf  of  another  corporation,  the  latter  must  have  the 
power  to  hold  corporate  securities.  A  common  form  is  as 
follows : 


478  SUPPLEMENTARY    FORMS 

FORM  7 
OPTION    ON    STOCK 

This  agreement  made  this day  of 19. . . ., 

between of ,  party  of  the  first  part, 

and of ,  party  of  the  second  part, 

witnesseth : 

In  consideration   of dollars,   the  receipt  whereof  is 

hereby  acknowledged,  the  party  of  the  first  yiari  hereby  agrees  to 

sell shares  of  the  capital  stock  of  the 

corporation  at   dollars  per  share  at  any  time 

within days  from  date. 

All  dividends  or  extra  dividends  declared  during  said  time  are 

to  go  with  the  stock;   and   days'  notice  of  acceptance 

will  be  given  by  said  party  of  the  second  part. 

In  witness,  etc. 

Subscription  Lists.  —  The  incorporators  of  a  proposed 
corporation  usually  circulate  subscription  lists  to  secure 
subscribers  to  such  portion  of  the  stock  of  the  proposed 
corporation  as  may  be  required  by  law.  The  subscriptions 
may  be  taken  on  a  single  blank  or  on  individual  blanks. 


FORM  8. 
SIMPLE    SUBSCRIPTION     LIST 

The  Interstate  Chemical  Compnny  to  be  incorporated  under 
the  laws  of  New  Jersey  by  Rudolph  Johnson,  B.  M.  Squires  and 
Frank  A.  Ross. 

Capital  Stock  $100,000  Shares  $100  each. 

We,  the  undersigned,  hereby  severally  subscribe  for  and  agree 
to  take  at  their  par  value  the  number  of  shares  of  the  capital 
stock  of  the  Interstate  Chemical  Company  set  opposite  our  re- 


SECURITIES-ISSUING    ORGANIZATIONS     4T9 

spective  signatures,  said  subscriptions  to  become  due  as  soon  as 
said  company  is  organized  and  to  be  then  payable  in  cash  on 
demand  of  the  Treasurer  of  the  company. 
Newark,  New  Jersey 
June  1,  1921. 

names  addresses  shares      amounts 


Subscriptions  may  be  made  either  revocable  or  irrevoca- 
ble and  subject  to  acceptance  by  the  corporation  when 
formed.  They  are  frequently  negotiated  with  a  trustee 
acting  for  the  company  as  follows: 

FORM   9. 
TRUSTEE'S     SUBSCRIPTION     LIST 

{Heading  same  as  above.) 

We,  the  undersigned,  hereby  agree  with as 

trustee  for  the company,  to  subscribe,  and 

do  hereby  severally  subscribe,  for  the  number  of  shares  of  the 
capital  stock  of  said  company  set  opposite  our  respective  signa- 
tures, and  agree  to  pay  par  value  thereof  as  follows: 

Ten  per  cent  on  demand  to as  Trustee  for 

said  company,  such  payment,  or  so  much  thereof  as  may  be 
necessary,  to  be  used  for  the  preliminary  and  incorporating  ex- 
penses of  said  company;  thirty  per  cent  to  the  Treasurer  of  the 
Company  so  soon  as  said  company  is  organized;  and  sixty  per 
cent  within  ninety  days  thereafter. 

Corporation  Charter.  —  The  charter  or  certificate  of  in- 
corporation is  a  contract  between  the  state  and  the  incor- 
porators by  virtue  of  which  the  corporation  is  created  and 
its  powers  are  defined.  With  proper  adjustments  the  form 
here  given  would  be  satisfactory  for  most  small  corpora- 
tions. 


480  SUPPLEMENTARY    FORMS 

FORM   10 
CERTIFICATE   OF   INCORPORATION 

OF  THE 

FIT-WELL   CLOTHING   CORPORATION 

(State  of  New  York) 

We,  the  undersigned,  all  being  of  full  age  and  two-thirds  being 
citizens  of  the  United  States  and  one  of  us  a  resident  of  the 
state  of  New  York,  for  the  purpose  of  forming  a  corporation 
under  the  Business  Corporation  Law  of  the  State  of  New  York, 
do  hereby  certify  and  set  forth: 

First  —  The  name  of  said  corporation  shall  be  "  Fit-Well 
Clothing  Corporation." 

Second  —  The  purposes  for  which  said  corporation  is  to  be 
formed  are  as  follows: 

(a)  To  conduct  and  carry  on  the  business  of  cutting  out, 
making,  and  preparing  clothing  and  wearing  apparel  of  all  kinds, 
and  of  all  other  articles  which  may  be  conveniently  or  advantage- 
ously handled  in  connection  with  the  aforesaid  business. 

(6)  To  buy,  sell,  import,  export,  and  deal  in  and  with  woolen, 
cotton,  silk,  and  other  textile  fabrics,  and  in  any  and  all  other 
materials  useful  or  necessary  in  the  manufacture  of  clothing  or 
wearing  apparel. 

(c)  To  lease,  buy,  sell,  use  and  hold  all  such  property,  real  or 
personal,  as  may  be  necessary  or  convenient  in  connection  with 
the  said  business. 

((/)  To  do  any  and  all  things  set  forth  in  this  certificate  as 
objects,  purposes,  powers  or  otherwise,  to  the  same  extent  and  as 
fully  as  natural  persons  might  do,  and  in  any  part  of  the  world. 

Third  —  The  amount  of  capital  stock  of  said  corporation  shall 
be  Three  Hundred  Thousand  Dollars  ($300,000). 

Fourth  —  The  number  of  shares  of  which  said  capital  stock 
is  to  consist  shall  be  Three  Thousand  (3,000)  shares,  of  the 
par  value  of  One  Hundred  Dollars  ($100)  each. 

Of  said  capital  stock  One  Thousand  (1,000)  shares,  of  the  par 
value  of  One  Hundred   Thousand  Dollars    ($100,000)    shall   be 


SECURITIES-ISSUING    ORGANIZATIONS     481 

cumulative  preferred  stock,  entitled  to  an  annual  dividend  of 
seven  per  cent  (7%)  from  the  profits  of  the  corporation,  payable 
semi-annually,  on  the  tenth  days  of  January  and  July  in  each 
year,  before  any  dividends  are  paid  upon  the  common  stock,  and 
to  share  equally  with  the  conraion  stock  in  any  excess  paid  in 
any  year  above  seven  per  cent  (7%)  to  all  the  stock,  and  in  the 
event  of  Hquidation  or  dissolution  from  any  cause  said  preferred 
stock  shall  be  entitled  to  be  paid  in  full  from  the  assets  of  the 
corporation  before  anything  is  paid  to  the  common  stock.  The 
holders  of  such  preferred  stock  shall  not  be  entitled  to  vote  in 
any  meeting  of  the  stockholders  or  election  of  directors,  unless 
the  accumulated  dividends  due  and  unpaid  such  preferred  stock 
at  the  time  shall  equal  or  exceed  seventeen  and  one-half  per  cent 
(171/2%)  of  the  par  value  of  said  stock. 

Of  said  capital  stock  Two  Thousand  shares  of  the  par  value  of 
Two  Hundred  Thousand  Dollars  ($200,000)  shall  be  common 
stock  of  the  corporation. 

Fifth  —  The  principal  business  ofhce  of  said  corporation  shall 
be  located  in  the  Borough  of  Manhattan  and  in  the  City,  County 
and  State  of  New  York. 

Sixth  —  The  duration  of  said  corporation  shall  be  perpetual. 

Seventh  —  The  number  of  directors  of  said  corporation  shall 
be  five. 

Eighth  —  The  names  and  post  office  addresses  of  the  directors 
of  said  corporation  for  the  first  year  are  as  follows: 

(omitted) 

Ninth  —  The  names  and  post  office  addresses  of  the  sub- 
scribers to  this  certificate,  and  the  number  of  shares  which  each 
agrees  to  take  in  said  corporation  are  as  follows: 

Names                                  Addresses  Shares 

Julius  Goldstein  Broadway,  New  York  City  5 

Max  Engels  Montclair,  New  Jersey  5 

William  J.  Friedman  Fifth  Ave.,  New  York  City  5 

Tenth  —  At  all  elections  of  directors  of  this  corporation  each 
stockholder  shall  be  entitled  to  as  many  votes  as  shall  equal 
the  number  of  his  shares  of  stock,  multiplied  by  the  number  of 


482  SUPPLEMENTARY    FORMS 

directors  to  be  elected,  and  he  may  cast  all  of  such  votes  for  a 
single  director  or  may  distribute  them  among  the  number  to  be 
voted  for,  or  any  two  or  more  of  them,  as  he  may  see  fit. 

In  WITNESS  WHEREOF,  we  have  made  and  signed  this 
certificate  in  duplicate  this  9th  day  of  June,  one  thousand  nine 
hundred  and  twenty-one. 

Julius  Goldstein 
Max  Engels 
William   J.   Friedman 


STATE  OF  NEW  YORK      SSI 

County  of  New  York 

Personally  appeared  before  me  this  9th  day  of  June,  1921, 
Julius  Goldstein,  Max  Engels,  and  William  J.  Friedman,  to  me 
personally  known  to  be  the  persons  described  in  and  who  exe- 
cuted the  foregoing  certificate  and  severally  acknowledged  that 
they  executed  the  same  for  the  purposes  therein  set  forth. 

(notarial  \ 
seal    / 

Henry  J.  Miller, 
Notary  Public  for 
New  York  County 

Object  or  Purpose  Clauses. — Attorneys  who  make  a 
specialty  of  drafting  charters  for  corporations  have  prepared 
a  great  number  of  more  or  less  standardized  object  or  pur- 
pose clauses  applicable  to  many  different  kinds  of  enter- 
prises and  businesses.  These  must  be  prepared  with  great 
care  because  the  corporation  possesses  only  such  powers 
as  have  been  specifically  delegated  to  it,  and  the  courts  are 
usually  not  very  liberal  in  interpreting  these  powers.  They 
must,  of  course,  be  consistent  with  the  laws  of  the  state  in 
which  incorporation  is  effected. 


SECURITIES-ISSUING    ORGANIZATIONS     483 

FORM   11 

AUTOMOBILES 

To  purchase,  lease,  and  acquire  lands  and  buildings  for  use  as 
manufactories,  warehouses,  and  offices;  to  manufacture,  buy,  sell, 
import,  and  export  vehicles  of  all  kinds  propelled  by  mechanical 
power;  engines  and  appliances  for  the  generation  and  use  of 
steam,  electricity,  gasolene,  or  other  form  of  power  for  propelling 
carriages,  wagons,  trucks,  cars,  and  vehicles  of  every  kind  and 
description;  all  parts  and  portions  of  such  veliicles,  engines,  and 
machinery,  and  all  things  incident  to  or  used  in  connection  with 
the  same. 

FORM    12 
DEPARTMENT  STORE 

To  buy,  lease,  construct,  or  otherwise  acquire  storerooms, 
warehouses,  and  other  buildings;  to  buy  and  sell  all  kinds  of 
merchandise;  to  equip,  conduct,  and  operate  a  general  depart- 
ment store;  to  estabhsh  therein  stores  for  the  purchase  and  sale 
of  dry  goods,  millinery,  cloth,  and  fabrics,  gents'  furnishing  goods 
women's  clothing,  men's  and  boy's  clothing,  hats,  boots  and 
shoes,  furniture,  carpets  and  draperies,  drugs  and  chemicals, 
hardware,  china  and  glassware,  silver,  jewelry,  pictures,  books, 
stationery,  photographs  and  photographers'  supplies,  perfumery, 
toilet  articles,  and  bicycles.  (Enumeration  made  to  cover  any 
classes  of  business  desired). 

FORM    13 
HARDWARE  MANUFACTURE  AND  SALE 

(a)  To  buy,  sell,  import,  export,  and  generally  deal  in  and 
with  all  kinds  of  tools,  hardware,  and  machinery;  to  establish, 
maintain,  and  operate  shops  and  factories  for  the  manufacture 
and  construction  of  all  kinds  of  tools,  hardware,  machines,  and 
mechanical  construction. 


484  SUPPLEMENTARY    FORMS 

(6)  To  buy,  sell,  and  generally  deal  in  iron,  steel,  manganese, 
copper,  zinc,  brass,  and  other  metals,  and  in  any  and  all  articles 
made  of  or  partly  consisting  of  metal,  wood,  and  other  materials, 
and  to  engage  in  the  repair  and  manufacture  of  all  goods,  wares, 
and  commodities  dealt  in  by  the  corporation. 


FORM  14 
GROCERY 

To  do  a  general  grocery  business,  handling  foodstuffs,  kitchen, 
dining-room  and  nursery  utensils  and  supplies  of  all  kinds;  to 
manufacture,  grow,  buy,  sell,  import,  export,  and  deal  in  canned 
and  preserved  foods  of  all  kinds,  fruits,  vegetables,  meats,  bever- 
ages, and  everything  known  as  or  used  in  or  sold  with  groceries; 
to  run  eating  establishments,  cafes,  restaurants,  and  to  serve 
beverages  of  all  kinds  therein;  to  buy,  own,  sell,  deal  in  vehicles, 
horses,  motors  and  other  conveyances  and  the  accessories  thereof 
for  delivering  groceries  and  goods;  to  do  any  and  all  things 
necessary  and  useful  to  forward  the  foregoing  objects. 


FORM  15 
MINING 

(a)  To  buy,  lease,  or  otherwise  acquire  mines,  mining  rights, 
quarries,  and  mineral  lands  of  every  kind,  nature,  and  descrip- 
tion, and  to  work,  mine,  prospect,  develop,  operate,  and  promote 
the  same;  to  mine,  quarry  and  excavate  copper,  gold,  silver, 
and  other  ores  and  metals  and  minerals  of  all  descriptions. 

(b)  To  buy,  lease,  construct,  own,  control,  operate,  and  main- 
tain mills,  work,  and  plants  for  the  cnishing,  sampling,  milling, 
smelting,  reduction,  and  concentration  of  minerals  and  metal- 
bearing  ores,  and  the  extraction  therefrom  of  all  kinds  of  metals 
and  mineral  products  and  by-products,  on  its  own  account  and 
as  factor  and  agent  for  others. 

(c)  To  treat,  prepare,  and  manufacture,  and  to  buy,  sell,  and 


SECURITIES-ISSUING    ORGANIZATIONS     485 

generally  deal  in  iron,  steel,  manganese,  coke,  copper,  lumber,  and 
other  materials,  and  all  or  any  articles  consisting  of  or  partly 
consisting  of  metal,  wood,  or  other  materials,  and  any  and  all 
products  and  by-products  thereof. 


FORM   16 
INVESTMENT  BROKERS 

To  buy,  sell  and  otherwise  acquire,  dispose  of  and  deal  in 
government,  municipal,  corporation,  association  and  individual 
bonds,  mortgages  and  debentures  of  all  kinds;  also  in  stocks  and 
choses  in  action  of  all  kinds,  in  trust  receipts,  receivers'  certifi- 
cates, commercial  paper  and  securities  and  evidences  of  indebted- 
ness of  all  kinds  of  social,  business  and  governmental  organiza- 
tions and  of  individual  persons;  to  do  any  and  all  things 
necessary  and  useful  to  forward  the  purposes  herein  expressed 
and  imphed. 

Capital  Stock  and  Special  Stock  Clauses.  —  The  capital 
stock  clause  given  in  Form  10  may  be  taken  as  a  standard 
for  par  value  stock.  When  stock  of  no  par  value  is  era- 
ployed  the  following  form  is  frequently  used. 


FORM  17 
CAPITAL  STOCK  OF  NO  PAR  VALUE 

The  number  of  shares  of  capital  stock  that  may  be  issued  by 
said  corporation  is  Three  Thousand  (3,000)  shares  which  shall 
have  no  nominal  or  par  value. 

In  a  few  states  preferred  stock  that  has  no  stated  or  par 
value  may  be  used.  The  following  form  would  provide  for 
such  stock. 


486  SUPPLEMENTARY    FORMS 

FORM   18 
PREFERRED  STOCK  OF  NO  PAR  VALUE 

The  holders  of  the  preferred  stock  of  the  corporation  shall  be 
paid  from  the  surplus  profits  an  annual  cumulative  dividend  of 
Seven  Dollars  ($7)  on  each  and  every  share  of  such  stock,  before 
any  dividend  is  paid  to  the  holders  of  the  common  stock  or 
other  disposition  is  made  of  such  profits,  but  shall  not  participate 
in  any  further  dividends. 

The  preference  as  to  assets  and  denial  of  voting  power 
may  be  stated  as  in  Form  10. 

FORM   19 
NON-CUMULATIVE  PREFERRED  STOCK 

Said  preferred  sto!"k  shall  entitle  the  holders  to  receive  in  each 
year  a  dividend  of  eight  per  cent,  payal^le  half-yearly,  before  any 
dividend  shall  be  set  apart  or  paid  on  such  general  or  common 
stock,  and  if  the  net  profits  in  any  year  shall  not  be  sufficient  to 
pay  a  di\adend  of  eight  per  cent  on  said  preferred  stock,  then 
such  dividend  shall  be  paid  thereon  as  the  net  profits  of  the  year 
;\'ill  suffice  to  pay.  The  holders  of  the  preferred  stock  shall  have 
a  preference  on  the  assets  of  the  company,  but  the  dividends 
thereon  are  not  to  be  cumulative,  but  shall  be  payable  each  year 
only  out  of  the  profits  of  that  year,  and  such  preferred  stock 
and  the  certificates  therefor  may  be  issued  by  the  board  of 
directors  by  resolution.     (American  Tobacco  Companies). 

FORM   20 
REPRESENTATIVE  TYPES  OF  PREFERRED  STOCK 

1.  The  Sherwin-Williams  Company  of  Canada,  Ltd.  has  an 
authorized  capital  stock  of  $8,000,000,  of  which  $4,000,000  con- 
sists of  seven  per  cent  cumulative  preferred  stock  of  $100  par 
value,  preferred  as  to  assets  as  well  as  dividends. 


SECURITIES-ISSUING    ORGANIZATIONS     487 

2  The  United  States  Envelope  Company,  with  an  authorized 
capital  stock  of  $5,000,000,  has  $4,000,000  of  seven  per  cent 
cumulative  preferred  stock  of  $100  par  value  with  preference  as 
to  assets  as  well  as  dividends  and  equal  voting  rights  with  com- 
mon stock. 

3.  The  Weyman-Burton  Company's  preferred  stock  has  prefer- 
ence as  to  assets  as  well  as  to  dividends.  No  prior  lien  (on  the 
property)  to  the  preferred  stock  can  be  created  without  the 
consent  of  two-thirds  in  interest  of  each  class  of  stockholders. 
Both  classes  have  full  voting  power  and  are  fully  paid  and  non- 
assessable and  no  personal  liability  attaches  to  the  holder. 

4.  The  United  Paperboard  Company,  Inc.,  has,  in  addition  to 
$12,000,000  authorized  common  stock,  $2,500,000  of  six  per  cent 
non-cumulative  preferred  stock  of  $100  par  value.  It  has  pref- 
erence as  to  dividends  and  assets  and  is  accorded,  share  for  share, 
the  same  voting  power  as  the  common  stock.  No  mortgage  can 
be  created  without  the  consent  of  three-fourths  of  the  preferred 
stock  outstanding.  The  preferred  stock  is  also  subject  to  call 
as  a  whole  for  redemption  at  $110  per  share  after  three  years 
from  date  of  issue.  A  sinking  fund  is  also  provided  for  its  re- 
demption. (This  stock  has  many  of  the  characteristics  of  a 
credit  rather  than  an  ownership  security). 

5.  The  American  Window  Glass  Company's  seven  per  cent 
cumulative  preferred  stock  of  $100  par  value  has  preference  as 
to  dividends,  but  not  as  to  assets. 

6.  The  Autosales  Corporation's  six  per  cent  non-cumulative 
preferred  stock  of  $50  par  value  has  preference  as  to  dividends 
as  well  as  to  assets  and  is  participating,  so  that  any  dividends 
declared,  after  six  per  cent  on  preferred  and  six  per  cent  on 
common,  shall  be  distributed  ratably  on  preferred  and  common 
shares.  The  consent  of  seventy-five  per  cent  of  the  outstanding 
preferred  stock  is  necessary  to  mortgage  or  encumber  the  prop- 
erty of  the  corporation.  Both  classes  of  stock  have  equal  voting 
power. 

7.  The  Central  Sugar  Corporation's  seven  per  cent  curaulative 
preferred  stock  of  $100  par  value  has  preference  to  assets  as  well 
as  dividends  and  is  redeemable  at  the  company's  option  in  whole 
or  in  part  at  $115  per  share  and  accrued  dividends.    It  is  con- 


488  SUPPLEMENTARY    FORMS 

vertible  at  any  time  (unless  previously  called  for  redemption)  at 
the  holder's  option  into  common  stock,  share  for  share.  No 
mortgage  can  be  placed  on  the  property  without  the  consent  of 
two-thirds  of  the  outstanding  preferred  stock.  An  annual  sink- 
ing fund  of  twenty-five  per  cent  of  the  net  profits  is  to  be 
applied  to  the  retirement  of  the  preferred  stock  at  not  exceeding 
$115  and  accrued  dividends.  Both  classes  have  equal  voting 
power. 

8.  The  Columbia  Graphophone  Manufacturing  Company  has 
outstanding  a  seven  per  cent  cumulative  non-participating  pre- 
ferred stock  of  $100  par  value  with  preference  as  to  dividends  and 
assets.  It  may  be  redeemed  at  $110  and  dividends  on  any  divi- 
dend date  on  two  weeks'  notice,  and  when  so  redeemed  it  is  to  be 
cancelled.  The  company  must  set  aside,  each  six  months,  out  of 
the  net  profits  one  and  one-half  per  cent  of  the  maximum  par 
amount  of  preferred  stock  theretofore  issued,  as  a  sinking  fund  to 
be  used  in  the  purchase  or  redemption  of  preferred  stock.  This 
sinking  fund  requirement  is  cumulative. 

Forms  of  Stock  Certificates.  —  There  are  many  forms 
of  the  stock  certificate,  but  in  their  essential  characteristics 
they  are  much  alike.  The  preferred  stock  certificates  prac- 
tically always  give  on  their  face  the  conditions  under 
which  the  preferred  stock  is  held  and  the  right  and  prefer- 
ences to  which  the  holder  is  entitled.  Where  only  one  class 
of  stock  is  issued,  the  common  stock  certificate  is  usually 
very  simple,  but  if  several  classes  of  stock  are  used  the 
preferences  of  the  other  classes  are  frequently  set  forth  on 
the  face  of  the  common  stock  certificate.  On  the  reverse 
side  of  the  certificate  is  printed  an  assignment  and  transfer 
form  which  is  filled  in  in  blank  or  in  the  name  of  the  per- 
son to  whom  the  shares  are  sold  by  the  owner.  The  follow- 
ing forms  illustrate  some  of  these  points. 


SECURITIES-ISSUING    ORGANIZATIONS     489 

FORM  21 


490  SUPPLEMENTARY    FORMS 

FORM  21  b 

(FOKM  OF  ASSIGNUENT  ON  THE  BACK  OF  THE  PENNSYLVANIA  RATTB0<» 

CoifPANY  Stock  Certificate] 

<  ^  tA/nav2/  xiW  c/llen/  Jaw  incAe/  t/zicAentA, 

jS  ?      that ,  the  undersigned  J  or  value  received,  have  bargained, 

0  5      sold,  assigned,  and  transferred,  and  by  these  presents  do 
^  0      bargain,  sell,  assign,  and  transfer,  unto 


z  . 


81 


9  ^ 
S  < 


<  H 


Shares  of  the  Capital  Stock  of  The  Pennsylvania 


Railroad  Company,  and  do  hereby  constitute  and  appoint 


n  H 

^g      true  and  lawful  Attorney ^  irrevocable,  for and  in. 


name  and  stead,  but  to  the  use  of  the  above-named  assignee 

I  g  to  make  and  execute  all  necessary  acts  of  assignment  and 

g  g  transfer  of  the  said  stock  on  the  books  of  the  said  Company, 

w  ^  and  Attorneys  one  or  more  to  substitute  itnth  like  full  power 

s  j  for  the  purposes  aforesaid,  hereby  ratifying  and  confirming 

H  E  all  that  said  Attorney,  or  his  substitute  or  substitutes  shall 

I  «  lawfully  do  by  virtue  hereof. 

I  jj  Stv    ii)  AtneAA'    (JJakix&qI', Have   hereunto   set 

n  »      hand  and  seal,  this day 

°  H      of one  thousand  nine  hundred 

^  E      (ind 

LS 


„  H   H 

g  g  5   Signed,  Sealed,  and  Delivered 
fl  0  I  in  presence  of 


SECURITIES-ISSUING    ORGANIZATIONS     491 

FORM  22 


492  SUPPLEMENTARY    FORMS 


FORM  22  b 

[FbiH  or  AanoHifXNT  on  thx  Back  or  the  United  States  Steel.  CoxpoiAnoN 
Pbeteksed  Stock  CESTincATE] 


For  value  Received Jiereby  sell,  assign,  and  transfer  unto 


Shares 


of  the  Capital  Stock  represented  by  the  within  Certificate 
and  do  hereby  irrevocably  constitute  and  appoint 

Attorney 

to  transfer  the  said  stock  on  the  Books  of  the  within  named 
Corporation  with  full  power  of  substitution  in  the  premises. 

Dated IQ 


In  Presence  of 


Pi 


SECURITIES-ISSUING    ORGANIZATIONS     493 

FORM  23 
CERTIFICATE   OF  COMMON  STOCK  GIVING  TERMS  OF 

Number                          PREFERRED  ISSUE                              Shares 
2506  

URBAN   MOTION   PICTURE  INDUSTRIES,  INC. 

Incorporated  Under  the  Laws  of  the  State  of  New  York. 

Capital  Stock,  $10,500,000 

Preferred,  $3,500,000  — Common,  $7,000,000 

Not  Valid  Unless  Countersigned  by  the  Empire  Trust  Co. 

THIS  CERTIFIES  THAT is  the  owner  of 

Shares  of  the  Common  Capital 

Stock  of  the  Urban  Motion  Picture  Industries,  Inc.,  full 
paid  and  non-assessable,  transferable  only  on  the  books  of  this 
Corporation  in  person  or  by  Attorney  upon  surrender 
of  this  certificate  properly  endorsed. 

The  Preferred  Stock  shall  be  entitled  to  receive 
cumulative  dividends  at  the  rate  of  eight  per  cent 
per  annum,  payable  semi-annually,  and  no  more,  out 
of  the  earnings  of  the  Corporation,  in  preference  to 
any  dividends  upon  the  Common  Stock,  and  such 
stock  shall  be  entitled  to  be  paid  in  full  upon  any 
distribution  of  the  assets  of  the  Corporation  before  any 
distribution  of  capital  shall  be  made  to  Common 
Stock,  but  shall  not  be  entitled  to  vote  at  any  meeting 
(seal)  of  the  stockholders  except  as  expressly  required  by 
statute. 

In  Witness  Whereof,  the  said  Corporation  has 
caused  this  Certificate  to  be  signed  by  its  duly 
authorized  officers  and  its  Corporate  Seal  to  be  here- 
unto affixed,  this day  of a.d. 

192.. 


Asst.  Secretary  or  Treasurer.  President  or  Vice-President. 

SHARES  $25  EACH 
Empire  Trust  Company,  Transfer  Agent 
Countersigned 

By 

Assl.  Secy. 


194)  SUPPLEMENTARY    FORMS 

FORM  24 

CERTIFICATE   OF   COMMON   STOCK   WITHOUT   PAR   OR 
NOMINAL  VALUE 

New  York 
Full  Paid  and  Non-assessahle. 

No Shares 

United  Motors  Corporation. 

Incorporated  under  tlie  laws  of  the  State  of  New  York. 

Total  authorized  stock,  1,200,000  shares,  all  without  nominal  or 

par  value. 

"  Class  A,"  1,195,000  shares.  "  Class  B,"  5,000  shares. 

This  certifies  that is  the  owner 

of shares  of  the  "  Class  A  "  stock,  full  paid  and  non- 
assessable, wnthout  nominal  or  par  value,  of  United  Motors  Cor- 
poration, transferable  in  person  or  by  attorney,  on  the  books 
of  the  corporation,  on  surrender  of  this  certificate  duly  indorsed. 

The  authorized  stock  of  said  corporation  consists  of  1,195,000 
shares  of  "  Class  A  "  and  5,000  shares  of  "  Class  B  "  stock,  all 
without  nominal  or  par  value.  Only  the  holders  of  the  "Class  B  " 
stock  are  entitled  to  voting  power  of  said  corporation,  but  the 
holders  of  "  Class  A  "  stock  are  entitled  to  all  other  rights  and 
privileges  of  stockholders  in  said  corporation.  This  certificate 
is  not  valid  until  countersigned  by  the  transfer  agent  and 
registered  by  the  registrar. 

Witness  the  seal  of  the  corporation  and  the  signature  of  its 
duly  authorized  officers  this day  of 19. .. 

Asst.  Secretary.  Vice-President. 

Registered : 

Bankers  Trust  Company,  Registrar, 

By Asst.  Secretary. 

Countersigned : 
Guaranty  Trust  Co.  of  New  York, 

By Asst.    Secretary. 


SECURITIES-ISSUING    ORGANIZATIONS     495 

Lost  Certificates.  —  In  case  a  certificate  becomes  lost  tlie 
transfer  agent  is  notified  to  stop  the  transfer  of  the  title 
to  the  stock,  and  a  notice  such  as  the  following  is  usually 
inserted  in  the  financial  columns  of  the  daily  papers. 

FORM  25 
NOTICE  OF  STOPPAGE  OF  TRANSFER 

Xost  —  Certificate  No.  B.  110042  for  10  shares  Northern  Pacific 
Railway  Co.;  certificate  No.  N-25355  for  10  shares  Chesapeake  & 
Ohio  Railroad;  certificate  No.  A-70519  for  10  shares  New  York 

Central  Railroad;  aU  in  the  name  of lost  in 

transit  between  City  Hall  Post  Office,  New  York,  and  the  First 
National  Bank,  Bradentown,  Florida.  Transfer  has  been  stopped. 
If  found  kindly  notify  Atlantic  National  Bank,  237  Broadway, 
New  York. 

In  order  to  have  a  new  certificate  issued  to  replace  one 
that  has  been  lost  or  destroyed  a  bond  of  indemnity  similar 
to  the  following  is  required  of  the  owner. 

FORM  26 

BOND  OF  INDEMNITY  FOR  REISSUE  OF  LOST  STOCK 
CERTIFICATE 

The  undersigned,  George  Burton  and  the  Fidelity  Surety  Com- 
pany, hereby  acknowledge  ourselves  as  held  and  firmly  bound 
unto  the  Motive  Power  Company  of  New  York  in  the  sum  of 
ten  thousand  dohars  ($10,000),  for  the  payment  of  which  to  the 
said  corporation,  its  successors  and  assigns,  we  jointly  and  sever- 
ally bind  ourselves,  our  heirs,  executors,  administrators  and 
successors. 

Signed  and  sealed  by  us  this  day  of  19. .. 

The  condition  of  the  above  obligation  is  as  follows: 

Whereas,  The  said  George  Burton  is  recorded  on  the  transfer 
books  of  said  INIotive  Power  Company  of  New  York  as  the  owner 
of  fifty  (50)  shares  of  the  capital  stock  of  said  company,  and 


496  SUPPLEMENTARY    FORMS 

Whereas,  His  original  certificate  of  stock  No.  3,  issued  by  said 
company,  evidencing  his  ownership  of  fifty  shares  of  stock  has 
been  lost,  stolen  or  destroyed,  as  he  has  complained  to  said 
company,  and 

Whereas,  Upon  application  of  the  said  George  Burton  and 
pursuant  to  a  resolution  of  the  board  of  directors  of  the  said 
Motive  Power  Company  of  New  York  granting  the  same,  a  new 
certificate  for  the  said  fifty  shares  has  been  this  day  issued  to 
said  George  Burton  and  numbered  57; 

Now,  Therefore,  If  the  said  George  Burton,  his  heirs,  exec- 
utors and  administrators  shall  now,  and  at  all  times  hereafter, 
save,  defend,  keep  harmless  and  indemnify  the  said  Motive  Power 
Company  of  New  York,  its  legal  representatives,  successors  and 
assigns  from,  against  and  on  account  of  all  demands,  claims  or 
causes  of  action  arising  out  of,  upon,  or  connected  with  said 
certificate  No.  3,  for  said  fifty  shares  of  stock  in  said  company, 
or  any  actual  or  pretended  purchase  or  assignment  thereof,  and 
from  all  costs,  expenses  and  damages  that  shall  or  may  arise 
therefrom,  and  shall  also  surrender  and  deliver  up  to  said  com- 
pany for  cancellation  the  said  certificate  No.  3  whenever  and  so 
soon  as  it  may  be  found,  then  the  obligation  shall  be  void.  Other- 
wise in  full  force  and  effect. 

George  Burton, 

The  Fidelity  Surety  Company. 

By  M.  A.  Allen,  General  Agent. 

Signed,  sealed  and  delivered  in  presence  of  Arthur  B.  Morgan, 
Joseph  Harper. 

Bond  Forms.  —  While  bonds  are  not  essential  to  the 
organization  of  a  corporation,  they  are,  nevertheless,  ex- 
tensively employed  to  procure  capital  and  hence,  are  im- 
portant elements  of  capitalization.  The  following  very 
simple  forms  have  been  selected  to  illustrate  some  of  the 
features  of  the  bond  touched  upon  in  the  text. 


SECURITIES-ISSUING    ORGANIZATIONS     497 

FORM  27 
MORTGAGE  TO  SECURE  BONDS,  SHORT  FORM 

This  mortgage  made  the day  of ,  a.d.  19 .... , 

by  the Company,  of  the  city  of  Indianapohs, 

county  of  Marion,  state  of  Indiana,  party  of  the  first  part,  herein- 
after called  the  mortgagor,  unto  The   Trust 

Company  of  the  city  of  Indianapolis,  county  of  Marion,  state 
of  Indiana,  trustee  for  those  holding  the  obhgation  secured  by 
this  instrument,  party  of  the  second  part  hereinafter  called  the 
mortgagee. 

Witnesseth,  that  said  mortgagor  in  consideration  of  the  sum 
of dollars,  the  receipt  of  which  is  hereby  acknowl- 
edged, and  for  the  purpose  of  securing  the  repayment  of  said 
sums  with  interest,  as  hereinafter  provided,  and  the  performance 
of  the  covenants  hereinafter  contained,  hereby  mortgages  and 
warrants  unto  the  said  mortgagee,  assigns  or  successors,  in  this 
trust,  and  their  successors,  the  lands,  premises  and  property 
situated  in  the  city  of  Indianapolis,  county  of  Marion  and  state  of 
Indiana,  described  as  follows:  (here  Describe),  together  with  all 
and  singular  the  hereditaments  and  appurtenances  belonging  to 
said  mortgagor,  and  situated  on  the  above  described  premises, 
and  all  that  may  hereafter  be  put  thereon  or  attached  thereto 
in  any  way  or  form,  together  with  the  franchises  belonging  to 
said  mortgagor. 

Provided  always,  and  these  presents  are  upon  the  express  con- 
dition  that   whereas,   the  said Company, 

mortgagor,  has  executed  bonds  of  the  denomination  of  $1,000 
each  with  coupons  for  the  semi-annual  interest  thereon  at  the 
rate  of per  cent  per  annum,  bearing  even  date  here- 
with, and  delivered   the  same  to  the  mortgagee,  the  principal 

sum  of  which  said  bonds  is  payable  on  the day  of ,  a.d. 

19..,  and  the  interest  thereon  is  payable  on  the   days 

of and in  each  and  every  year  hereafter  until 

the  said  principal  sum  shall  be  paid  according  to  the  tenor  and 
effect  of  said  bonds  and  coupon  interest  notes,  and  which  said 
principal  and  interest  is  payable  at ,  if  said  mortgagor 


498  SUPPLEMENTARY    FORMS 

shall  pay  or  cause  to  be  paid  said  bonds  and  the  interest  thereon 
as  above  provided,  and  shall  keep  and  perform  the  covenants 

and  agreements  herein  contained  by to  be  performed, 

then  these  presents  and  said  bonds  shall  cease  and  shall  be  null 

and  void.    And  the  said Company,  mortgagor 

for  itself,  successors  and  assigns,  hereby  covenants  with  said 
mortgagee,  its  legal  representatives  and  assigns,  as  follows: 

First.    Said  mortgagor  will  pay  to  said  mortgagee,  its  legal 

representative  and  asj^igns,  the  said  sum  of dollars  with 

interest   thereon,   at   the   rate   of per   cent   per   annum, 

payable annually,    until    the    full    payment    of    said 

principal  sum  according  to  the  terms  of  said  bonds  aforemen- 
tioned, and  will  pay  interest  at  the  rate  of per  cent  per 

annum,  semi-annually,  upon  all  overdue  interest  or  principal  from 
the  time  of  its  maturity. 

Second.  The  said  mortgagor  within  forty  days  after  same 
shall  become  due  and  payable  will  pay  all  taxes  and  assessments, 
rates  and  charges,  and  all  labor,  mechanics'  or  other  liens  of  every 
name  and  nature  which  shall  be  levied  or  imposed  upon  said 
property,  or  upon  or  on  account  of  this  mortgage  or  the  in- 
debtedness secured  hereby  or  upon  the  interest  or  estate  in  said 
property  represented  by  this  mortgage,  whether  levied  or  imposed 
against  the  said  mortgagor  or  mortgagee,  and  the  mortgagor 
hereby  waives  any  and  all  claim  or  right  against  said  mortgagee 

its  legal  representatives  or  assigns  or successors  in 

this  trust,  to  any  payments  or  rebate  on  or  offset  against  the 
interest  or  principal  of  said  indebtedness  by  reason  of  the  pay- 
ment of  any  of  said  taxes,  assessments,  rates,  charges  or  labor 
or  mechanics'  liens.  Provided,  however,  that  if  the  sum  of 
interest  due  under  this  mortgage  in  any  one  year,  plus  the  taxes 
levied  upon  or  on  account  of  said  mortgage  in  the  same  year 
shall  exceed  the  rate  of  interest  allowed  by  law  to  be  stipulated 
therefor,  that  such  excess  of  taxes  shall  be  paid  by  said  trustee 
and  the  party  of  the  first  part  shall  in  no  case  be  liable  therefor. 

Third.  That  the  said  mortgagor  will  keep  all  destructible 
property  described  in  this  mortgage  or  situated  upon  the  lands 
described  in  this  mortgage  insured  against  loss  and  damage  by 
fire    in    responsible    insurance    companies    approved    by    the 


SECURITIES-ISSUING    ORGANIZATIONS     499 

mortgagee,  to  an  amount  not  less  than dollars,  and 

pay  the  premiums  therefor.    All  loss  in  policies  for  said  insurance 

to  be  payable  to  said  mortgagee,  as interest,  created  by 

this  mortgage  may  appear,  and  will  deliver  the  said  pohcies,  as 
Boon  as  issued  to  said  mortgagee. 

Fourth.  If  said  mortgagor  makes  default  in  the  payment  of 
any  of  the  aforesaid  taxes,  assessments,  rates  and  charges  of 
labor,  mechanics'  or  other  liens  and  effect  such  insurance  and  the 
sum  so  paid  shall  be  further  lien  on  the  aforesaid  premises  and 
property  under  this  mortgage,  prior  and  superior  to  said  bonds 
and  coupons  and  payable  forthwith,  with  interest  at  the  rate 
of per  cent  per  annum. 

Fifth.  Should  default  be  made  in  the  payment  of  any  instal- 
ment of  principal  maturing  hereon  before  the  whole  thereof 
becomes  due  or  of  any  instalment  of  interest  when  the  same 
becomes  due  and  payable  or  of  any  taxes,  assessments,  rates  and 
charges  or  of  any  labor  mechanics'  or  other  liens  or  of  any 
premiums  for  insurance,  or  any  part  thereof,  when  the  same  are 
payable  as  above  provided,  and  should  the  same  or  any  part 
thereof  remain  unpaid  for  a  period  of  thirty  days,  then  and  from 
thenceforth,  the  aforesaid  principal  sum  with  all  arrearages  of 
interest,  shall  at  the  option  of  said  mortgagee,  its  legal  repre- 
sentatives or  assigns,  become  due  and  payable  therefrom  and 
thereafter,  although  the  period  above  limited  for  the  payment  of 
the  same  shall  not  then  have  expired,  anything  hereinbefore  or 
in  said  bonds  contained  to  the  contrary  thereof  in  anywise 
notwithstanding. 

Sixth.    All  the  aforesaid  covenants  shall  run  with  the  land. 

Seventh.  That  upon  default  being  made  in  the  payment  of 
principal  or  interest  thereon,  or  of  any  part  thereof  at  the  time 
the  same  becomes  due  and  payable  according  to  the  terms  hereof, 
the  same  mortgagee,  its  legal  representative  or  assigns,  are  hereby 
authorized  and  empowered  to  foreclose  this  mortgage  in  any 
court  of  competent  jurisdiction,  and  any  judgment  rendered  m 
such  suit  in  favor  of  the  plaintiff  therein  shall  include  a  reason- 
able fee  for  the  attorney  of  the  plaintiff  for  his  services  in 
such  suit. 


500  SUPPLEMENTARY    FORMS 

In  Witness  Whereof  the  said  mortgagor  has  hereunto  set 
its  hand  and  seal  the  day  and  year  first  above  written. 

The Company 

By , 

President. 
(seal) 

Attest : 

Secretary. 

STATE  OF  INDIANA,  COUNTY  OF  MARION,  SS  t 

Personally  appeared  before  me, a  notary 

public   in   and   for   said    county    and   state,   the   above    named 

The Company,  by  its  president, 

and   acknowledged   the   execution   of   the   above   and   foregoing 
mortgage. 


Witness  my  hand  and  notarial  seal  this day  of . . . 

AD.  19 

(seal)  

Notary  Public. 


SECURITIES-ISSUING    ORGANIZATIONS     501 


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SECURITIES-ISSUING    ORGANIZATIONS     503 

By-Laws.  —  The  corporate  by-laws  are  the  basic  rules 
that  are  laid  down  by  the  stockholders  to  govern  the  man- 
agement of  the  administrative  affairs  of  the  corporation.  In 
small  corporations,  where  practically  all  of  the  stockholders 
are  also  the  directors,  by-laws  are  usually  reduced  to  a 
minimum  or  are  dispensed  with  entirely.  However,  in 
large  corporations  they  are  extremely  important  because 
they  serve  as  a  grant  of  authority  to  the  directors  and  offi- 
cers and  also,  in  a  measure,  set  forth  their  duties  and 
obligations.  With  the  exception  of  special  features  and 
arrangements,  by-laws  have  become  more  or  less  stand- 
ardized, at  least  in  so  far  as  the  general  topics  treated  are 
concerned.  In  this  respect  the  by-laws  of  the  United 
States  Steel  Corporation  may  be  looked  upon  as  a  standard. 


FORM  29 

BY-LAWS  OF  UNITED  STATES  STEEL  CORPORATION 
AS  ON  SEPTEMBER  24,  1918 1 

Article  I 

STOCKHOLDERS 

Section  1.  Annual  Meeting.  The  annual  meeting  of  the  stock- 
holders of  the  Company  shall  be  held  annually  at  the  principal 
„     .  office  of  the  Company  in  the  State  of  New  Jersey, 

holders'  ^t  twelve  o'clock   noon,  on  the  third  Monday  in 

Annual  April  in  each  year,  if  not  a  legal  holiday,  and  if  a 

Meeting.  j^g^j  holiday  then  on  the  next  succeeding  Monday 

not  a  legal  holiday,  for  the  purpose  of  electing  directors,  and 
for  the  transaction  of  such  other  business  as  may  be  brought 

before  the  meeting;  and  the  terms  of  office  of  the 
Meeting  directors  of  the  several  classes  shall  continue  until 

the  election  of  their  successors  at  such  meeting 
as  provided  in  Article  II.  hereof. 

1  By  courtesy  of  the  United  States  Steel  Corporation. 


504  SUPPLEMENTARY    FORMS 

It  shall  be  the  duty  of  the  Secretary  to  cause  notice  of  each 
annual  meeting  to  be  published  once  in  each  of  the  four  calendar 
Advertisine  weeks  next  preceding  the  meeting  in  at  least  one 
Notice  of  newspaper  in  each  of  the  following  places:  Jersey 
Meeting.  City,  N.  J.,  New  York,  N.  Y.,  Chicago,  111.,  and 

Pittsburgh,  Pa.  Nevertheless,  a  failure  to  publish  such  notice, 
or  any  irregularity  in  such  notice,  or  in  the  publication  thereof, 
shall  not  affect  the  validity  of  any  annual  meeting,  or  of  any* 
proceedings  at  any  such  meeting. 

Section  2.  Special  Meetings.  Special  meetings  of  the  stock- 
holders may  be  held  at  the  principal  office  of  the  Company  in 
the  State  of  New  Jersey,  whenever  called  in  writ- 
Special  -j-jg^   Qj,  i^y  ^Q^g  i^y  ^  majority  of  the  Board  of 

Directors. 

Notice  of  each  special  meeting,  indicating  briefly  the  object  or 
objects  thereof,  shall  by  the  Secretary  be  published  once  in  each 
Advertising  ^^  ^^^^  ^°^^^  calendar  weeks  next  preceeding  the 
Notice  of  meeting,  in  at  least  one  newspaper  in  each  of  the 
Meetings.  following  places:  Jersey  City,  N.  J.,  New  York, 
N.  Y.,  Chicago,  III,  and  Pittsburgh,  Pa.  Nevertheless  if  all  the 
stockholders  shall  waive  notice  of  a  special  meeting,  no  notice 
of  such  meeting  shall  be  required;  and  whenever  all  the  stock- 
holders shall  meet  in  person  or  by  proxy,  such  meeting  shall 
be  valid  for  all  purposes  without  call  or  notice,  and  at  such 
meeting  any  corporate  action  may  be  taken. 

Section  3.  Quorum.  At  any  meeting  of  the  stockholders  the 
holders  of  one-third  of  all  of  the  shares  of  the  capital  stock  of 
the  Company,  present  in  person  or  represented  by 
proxy,  shall  constitute  a  quorum  of  the  stockholders 
for  all  purposes,  unless  the  representation  of  a  larger  number  shall 
be  required  by  law,  and,  in  that  case,  the  representation  of  the 
number  so  required,  shall  constitute  a  quorum. 

If  the  holders  of  the  amount  of  stock  necessary  to  constitute 
a  quorum  shall  fail  to  attend  in  person  or  by  proxy  at  the  time 
and  place  fixed  by  these  by-laws  for  an  annual  meeting,  or  fixed 
by  notice  as  above  provided  for  a  special  meeting  called  by  the 
directors,  a  majority  in  interest  of  the  stockholders  present  in 
person  or  by  proxy  may  adjourn,  from  time  to  time,  without 
notice  other  than  by  announcement  at  the  meeting,  until  holders 


SECURITIES-ISSUING    ORGANIZATIONS     505 

of  the  amount  of  stock  requisite  to  constitute  a  quorum  shall 
attend.  At  any  such  adjourned  meeting  at  which  a  quorum  shall 
be  present,  any  business  may  be  transacted  which  might  have 
been  transacted  at  the  meeting  as  originally  notified. 

Section  4.  Organization.  The  Chairman  of  the  Board  and 
in  his  absence,  the  Chairman  of  the  Finance  Committee,  and  in 
the  absence  of  both,  the  President,  shall  call  meet- 
Organiza-  jj^gg  ^f  ^j^g  stockholders  to  order,  and  shall  act  as 
chairman  of  such  meetings.  The  Board  of  Direc- 
tors or  Finance  Committee  may  appoint  any  stockholder  to  act 
„    .  as  chairman  of  any  meeting  in  the  absence  of  the 

Chairman  of  the  Board  and  of  the  Chairman  of  the 
Finance  Committee  and  of  the  President. 

The  Secretary  of  the  Company  shall  act  as  secretary  at  all 
meetings  of  the  stockholders:   but  in  the  absence  of  the  secre- 
tary at  any  meeting  of  the  stockholders  the  pre- 
siding officer  may  appoint  any  person  to  act  as 
secretary  of  the  meeting. 

Section  5.  Voting.  At  each  meeting  of  the  stockholders, 
every  stockholder  shall  be  entitled  to  vote  in  person,  or  by  proxy 
appointed  by  instrument  in  writing,  subscribed  by 
such  stockholder  or  by  his  duly  authorized  attorney, 
and  delivered  to  the  inspectors  at  the  meeting;  and  he  shall  have 
one  vote  for  each  share  of  stock  standing  registered  in  his  name 
at  the  time  of  the  closing  of  the  transfer  books  for  said  meeting. 
The  votes  for  directors,  and,  upon  demand  of  any  stockholder,  the 
votes  upon  any  question  before  the  meeting,  shall  be  by  ballot. 

At  each  meeting  of  the  stockholders,  a  full,  true  and  complete 
list,  in  alphabetical  order,  of  all  of  the  stockholders,  entitled 
List  of  ^°  ^°^®  ^*  ^^^^  meeting,  and  indicating  the  number 

Stock-  of  shares  held  by  each,  certified  by  the  Secretary  or 

holders.  by  the  Treasurer,  shall  be  furnished.    Only  the  per- 

sons in  whose  names  shares  of  stock  stand  on  the  books  of  the 
Company  at  the  time  of  the  closing  of  the  transfer  books  for  such 
meeting,  as  evidenced  by  the  list  of  stockholders  so  furnished, 
shall  be  entitled  to  vote  in  person  or  by  proxy  on  the  shares  so 
standing  in  their  names. 

Prior  to  any  meeting,  but  subsequent  to  the  time  of  closing  the 
transfer  books   for  such   meeting,   any   proxy  may  submit   his 


506  SUPPLEMENTARY    FORMS 

powers  of  attorney  to  the  Secretary,  or  to  the  Treasurer,  for 
examination.  The  certificate  of  the  Secretary,  or  of  the  Treas- 
urer, as  to  the  reguhirity  of  such  powers  of  attorney,  and  as  to 
the  number  of  shares  held  by  the  persons  who  severally 
and  respectively  executed  such  powers  of  attorney,  shall  be 
received  as  prima  facie  evidence  of  the  number  of  shares  repre- 
sented by  the  holder  of  such  powers  of  attorney  for  the  purpose 
of  establishing  the  presence  of  a  quorum  at  such  meeting  and 
of  organizing  the  same,  and  for  all  other  purposes. 

Section  6.    Inspectors.    At  each  meeting  of  the  stockholders, 
the  polls  shall  be  opened  and  closed,  the  proxies  and  ballots  shall 

be  received  and  be  taken  in  charge,  and  all  questions 
Inspectors       touching  the  qualification  of  voters  and  the  valichty 

of  proxies  and  the  acceptance  or  rejection  of  votes, 
shall  be  decided  by  three  inspectors.  Such  inspectors  shall  be 
appointed  by  the  Board  of  Directors  before  or  at  the  meeting, 
or,  if  no  such  appointment  shall  have  been  made,  then  by  the 
presiding  officer  at  the  meeting.  If  for  any  reason  any  of  the 
inspectors  previously  appointed  shall  fail  to  attend  or  refuse 
or  be  unable  to  serve,  inspectors  in  place  of  any  so  failing  to 
attend  or  refusing  or  unable  to  attend,  shall  be  appointed  in  like 
manner. 

Article  II 
BOARD   OF   DIRECTORS 


Directors. 


Section    1.      N umber ,    Classification    and    Term    of    Office. 

The  business  and  the  property  of  the   Company 

shall  be  managed  and  controlled  by  the  Board  of 
Directors. 

As  provided  in  the  certificate  of  incorporation,  the  directors 
shall  be  classified  in  respect  of  the  time  for  which  they  shall 

severally  hold  office,  by  dividing  them  into  three 
Classifica-        classes,   each    class   consisting   of   one-third   of   the 

whole  number  of  the  Board  of  Directors.  The 
directors  of  the  first  class  shall  be  elected  for  a  term  of  one  year; 
the  directors  of  the  second  class  shall  be  elected  for  a  term  of  two 
years,  and  the  directors  of  the  third  class  shall  be  elected  for 


SECURITIES-ISSUING    ORGANIZATIONS     507 

a  term  of  three  years.     At  each  annual  election,  the  successors 

to    the    directors    of    the    class    whose    term    shall 

Terms  of  expire  in  that  year,  shall  be  elected  to  hold  office 
esch   Class 

for  the  term  of  three  years,  so  that  the  term  of 

office  of  one  class  of  directors  shall  expire  in  each  year. 

The  number  of  directors  shall  be  fifteen;  but  the 

Number  of  number  of  directors  may  be  altered  from  time  to 
Directors. 

time  by  the  alteration  of  these  by-laws. 

In  case  of  any  increase  of  the  number  of  directors,  the  addi- 
tional directors  shall  be  elected  by  the  directors  then  in  office; 
one-third  of  such  additional  directors  for  the  unexpired  portion 
of  the  term  of  one  year;  one-third  for  the  unexpired  portion  of 
of  the  term  of  two  years,  and  one-third  for  the  unexpired  por- 
tion of  the  term  of  three  years,  so  that  each  class  of  directors 
shall  be  increased  equally. 

Every  director   shall   be   a  holder   of  at  least   one  share   of 

^.  the  capital  stock  of  the  Company.     Each  director 

Directors  i      ^ 

must  be  ^^^^^  serve  for  the  term  for  which  he  shall  have 

Stock-  been   elected,   and   until   his   successor   shall   have 

holders.  ^een  duly  chosen. 

At  all  elections  of  the  directors,  the  polls  shall  remain  open 

for  at  least  one  hour,  unless  every  registered  owner 

Polls  open  q£  shares  has  sooner  voted  in  person  or  by  proxy, 
one  hour.  •  •       ,  .      ,    ,        ^  .  . 

or  m  writmg  has  waived  the  statutory  provision. 

Section  2.  Vacancies.  In  case  of  any  vacancy  in  the  direc- 
tors of  any  class  through  death,  resignation,  disqualification  or 

other  cause,  the  remaining  directors,  by  affirmative 
ya^ncies  y^^^  ^f  ^j^g  majority  thereof,  may  elect  a  successor 
in  Board.  ,,,rr>       r        /  .,.  -, 

to  hold  ornce  for  the  unexpired  portion  of  the  term 

of  the  director  whose  place  shall  be  vacant,  and  until  the  elec- 
tion of  his  successor.  Such  vacancy  shall  be  filled  upon  and  after 
nominations  therefor  shall  have  been  made  by  the  Finance 
Committee. 

Section  3.     Place  of  Meeting,  etc.    The  directors  may  hold 

their  meetings,  and  may  have  an  office  and  keep  the  books  of 

the  Company  (except  as  otherwise  may  be  provided 

Place  of  £qj,  ^y  lr^yf,■^  [j^  g^pj^j  place  or  places  in  the  State  of 

New  Jersey  or  outside  of  the  State  of  New  Jersey, 
as  the  Board  from  time  to  time  may  determine. 


508  SUPPLEMENTARY    FORMS 

Section  4.  Regular  Meetings.  Regular  meetings  of  the  Board 
of  Directors  shall  be  held  monthly  on  the  last  Tuesday  of  each 
P      ,  month,  if  not  a  legal  holiday,  and  if  a  legal  hohday, 

Monthly  then  on  the  next  succeecUng  Tuesday  not  a  legal 

Meetings.  holiday.  No  notice  shall  be  required  for  any  such 
regular  monthly  meeting  of  the  Board. 

Section  5.    Special  Meetings.    Special  Meetings  of  the  Board 

of  Directors  shall  be  held  whenever  called  by  direction  of  the 

Chairman  of  the  Board,  or  the  Chairman  of  the 

Special  Finance   Committee,  or  the  President,  or  of  one- 

JVLBCtinfiTS 

third  of  the  directors  for  the  time  being  in  office. 

The  Secretary  shall  give  notice  of  each  special  meeting  by 

mailing  the  same  at  least  two  days  before  the  meeting,  or  by 

telegraphing  the  same  at  least  one  day  before  the 

Notice  meeting,  to  each  director;  but  such  notice  may  be 

Required.  .      ,  ,.  '  _  ,  ,         .      .    ,.         , 

waived  by  any  director.    Unless  otherwise  indicated 

in  the  notice  thereof,  any  and  all  business  may  be  transacted  at  a 
special  meeting.  At  any  meeting  at  which  a  director  shall  be  pres- 
ent, even  though  without  notice,  any  business  may  be  transacted. 

Section    6.      Quorum.      Seven    Directors    shall    constitute    a 

quorum  for  the  transaction  of  business;  but  if  at  any  meeting  of 

the  Board  there  be  less  than  a  quorum  present,  a 

guorum.  majority  of  those  present  may  adjourn  the  meeting 

from  time  to  time. 

The  affirmative  vote  of  at  least  one-third  of  all  the  Directors 
for  the  time  being  in  office  shall  be  necessary  for  the  passage 
of  any  resolution. 

Section  7.    Order  of  Business.    At  meetings  of  the  Board  of 

Directors  business  shall  be  transacted  in  such  order 

Order  of  r^s  from  time  to  time,  the  Board  may  determine  by 
Business.  , 

resolution. 

At  all  meetings  of  the  Board  of  Directors,  the  Chairman  of 

the  Board,  or  in  his  absence  the  Chairman  of  the 

Presiding         Finance  Committee,  or,  in  the  absence  of  both  of 

these  officers,  the  President  shall  preside. 

Section   8.     Contracts.     Inasmuch   as   the   Directors   of  this 

Company  are  men  of  large  and  diversified  business 

Contracts.        interests,  and  are  likely  to  be  connected  with  other 

corporations  with  which  from  time  to  time  this  Company  must 


SECURITIES-ISSUING    ORGANIZATIONS     509 

have  business  dealings,  no  contract  or  other  transaction  between 
this  Company  and  any  other  corporation  shall  be  affected  by  the 
fact  that  directors  of  this  Company  are  interested  in,  or  are 
directors  or  officers  of,  such  other  corporation,  if,  at  the  meeting 
of  the  Board,  or  of  the  committee  of  this  Company,  making, 
authorizing  or  confirming  such  contract  or  transac- 
vo^te"o7°^  tion,  there  shall  be  present  a  quorum  of  directors 
least  seven  not  so  interested;  and  any  director  individually 
disinterested  j^.^y  ]-,e  a  party  to,  or  may  be  interested  in,  any 
contract  or  transaction  of  this  company,  provided 
that  such  contract  or  transaction  shall  be  approved  or  be  ratified 
by  the  affirmative  vote  of  at  least  seven  directors  not  so 
interested. 

The  Board  of  Directors  in  its  discretion  may  submit  any  con- 
tract or  act  for  approval  or  ratification  at  any  annual  meeting 

-  of  the  stockholders,  or  at  any  meeting  of  the  stock- 
Ratification      III  11    1    r        ;i  e  •  1     • 
by  Stock-        nolders  called  tor  the  purpose  oi  considering  any 

holders  of       such  act  or  contract;  and  any  contract  or  act  that 

Acts  or  gj^j^u  |-,g  approved  or  be  ratified  by  the  vote  of  the 

holders  of  a  majority  of  the  capital  stock  of  the 

Company  which  is  represented  in  person  or  by  proxy  at  such 

meeting    (provided   that   a   lawful    quorum    of   stockholders    be 

there  represented  in  person  or  by  proxy)  shall  be  valid  and  as 

binding  upon  the  corporation  and  upon  all  the  stockholders  as 

though  it  had  been  approved  or  ratified  by  every  stockholder  of 

the  corporation. 

Section  9.  Compensation  of  Directors.  For  his  attendance 
Compensa-  ^^  ^"^  meeting  of  the  Board  of  Directors,  or 
tion  of  Finance  Committee,  every  director  shall  receive  an 

Directors.  allowance  of  One  hundred  dollars  for  attendance 
at  each  meeting. 

Section  10.  Election  of  Officers  and  Committees.  At  the 
first  regular  meeting  of  the  Board  of  Directors  in  each  year  (at 
Election  of  ^^^''ich  a  quorum  shall  be  present)  held  next  after 
Officers  and  the  annual  meeting,  the  Board  of  Directors  shall 
Committees,  proceed  to  the  election  of  the  executive  officers  of 
the  Company,  and  of  the  Finance  Committee  to  be  elected  by  the 
Board  of  Directors  under  the  provisions  of  Article  III.  and 
Article  IV.  of  the  By-Laws. 


510  SUPPLEMENTARY    FORMS 

Article  III 
FINANCE   COMMITTEE 

Section  1.    The  Board  of  Directors  shall  elect  from  the  Direc- 
tors a  Finance  Committee,  and  shall  designate  for  such  com- 
mittee a  chairman,  who  shall  continue  to  be  chair- 
Fmance  j^g^j^  qJ  ^^le  committee  during  the  pleasure  of  the 

Board  of  Directors. 
The  Board   of   Directors  shall  fill  vacancies  in   the   Finance 
Committee  by  election  from  the  directors;   and  at  all  times  it 
shall  be  the  duty  of  the  Board  of  Directors  to  keep 
how^miS'       ^^^^  membership  of  such  committee  full,  with  due 
regard   to  the  qualifications  for  such  membership 
indicated  in  this  Article  of  the  By-Laws. 
All  action  by  the  Finance  Committee  shall  be  reported  to  the 
Board  of  Directors  at  its  meeting  next  succeeding 
Committee       ^^^^^  action,  and  shall  be  subject  to  revision  or  al- 
to be  teration  by  the  Board  of  Directors;  provided,  that 

reported  ^^  rights  or  acts  of  third  parties  shall  be  affected 

to  Board.         ,         ^         ,  .  .  ,     ^     . 

by  any  such  revision  or  alteration. 

The  Finance  Committee  shall  fix  its  own  rules  of  proceeding, 
and  shall  meet  where  and  as  provided  by  such  rules,  or  by  resolu- 
tion of  the  Board  of  Directors,  but  in  every  case 
Procedure  ^^^  presence  of  at  least  four  members  shall  be 
necessary  to  constitute  a  quorum. 

In  every  case  the  affirmative  vote  of  a  majority  of  all  of  the 
members  of  the  committee  present  at  the  meeting,  shall  be  neces- 
sary to  its  adoption  of  any  resolution. 

Section  2,  The  Finance  Committee  shall  consist  of  six  mem- 
bers, besides  the  Chairman  of  the  Board,  who,  by  virtue  of  his 
Tvr  h  h-  "ffi^6,  shall  be  a  member  of  the  Finance  Committee. 
So  far  as  practicable  each  of  the  six  elected  mem- 
bers of  the  Finance  Committee  shall  be  a  person  of  experience  in 
matters  of  finance.  Unless  otherwise  ordered  by  the  Board  of 
Directors,  each  elected  member  of  the  Finance  Committee  shall 
continue  to  be  a  member  thereof  until  the  expiration  of  his  term 
of  office  as  a  director. 


SECURITIES-ISSUING    ORGANIZATIONS     511 

The  Finance  Committee  shall  have  special  charge  and  con- 
trol of  all  financial  affairs  of  the  Company.  The  President,  the 
Vice-Presidents,  the  General  Counsel,  the  Treasurer, 
Powers  and  ^^le  Comptroller  and  the  Secretary,  and  their  re- 
spective offices  shall  be  under  the  direct  control  and 
supervision  of  the  Finance  Committee,  and  of  its  Chairman  when 
the  Committee  is  not  in  session. 

During  the  intervals  between  the  meetings  of  the  Board  of 
Directors,  the  Finance  Committee  shall  possess,  and  may  exer- 
cise all  the  powers  of  the  Board  of  Directors,  in  the  management 
of  all  the  affairs  of  the  Company,  including  its  purchases  of 
property,  and  the  execution  of  legal  instruments  with  or  without 
the  corporate  seal  in  such  manner  as  said  committee  shall  deem 
to  be  best  for  the  interests  of  the  Company,  in  all  cases  in  which 
the  specific  directions  shall  not  have  been  given  by  the  Board  of 
Directors. 

During   the   intervals   between   the   meetings   of   the   Finance 

Committee,  and  subject  to  its  review,  the  Chairman  of  the  Board 

and  the  Chairman  of  the  Finance  Committee  to- 

Powers  of       gether,  shall  possess,  and  may  exercise  any  of  the 

powers  of  the  committee,  except  as  from  time  to 

time  provided  by  resolution  of  the  Board  of  Directors. 

Except  as  otherwise  provided  by  the  By-Laws,  or 

Colo  TlpQ 

fixed  by  ^Y  resolution  of  the  Board  of  Directors,  all  salaries 

Finance  and  compensations  paid  or  payable  by  the  Company 

Committee.      ^YiaW  be  fixed  by  the  Finance  Committee. 

No  director  not  an  executive  officer  shall  become  a  salaried 
employee  of  the  Company  except  by  special  vote  of  the  Finance 
Committee. 

Article   IV 

OFFICERS 

Section  1.  Officers.  The  executive  officers  of  the  Company 
shall  be  a  Chairman  of  the  Board  of  Directors, 

Officers.  ^    Chairman   of  the   Finance   Committee,   a   Presi- 

dent, a  General  Counsel,  a  Treasurer,  a  Secretary 

and  a  Comptroller  all  of  whom  .shall  be  elected  by  the  Board 

of  Directors. 


512  SUPPLEMENTARY    FORMS 

The  Board  of  Directors  may  appoint  such  other  officers  as 
Other  they   may   deem   necessary,    who    shall    have    such 

Officers.  authority  and  shall  perform  such  duties  as  from 

time  to  time  may  be  prescribed  by  the  Board  of  Directors. 

One  person  may  hold  more  than  one  office. 

In  its  discretion,  the  Board  of  Directors  by  the  vote  of  a 
majority  thereof  may  leave  unfilled  for  any  such  period  as  it 
may  fix  by  resolution,  any  office  except  those  of  President,  Treas- 
urer, Secretary  and  Comptroller. 

All  officers  and  agents  shall  be  subject  to  removal   at  any 

time  by  the  affirmative  vote  of  a  majority  of  the  whole  Board  of 

Directors.    All  officers,  agents  and  employees,  other 

Offi"^  ^^^'^^  officers  appointed  by  the  Board  of  Directors, 

shall  hold  office  at  the  discretion  of  the  committee 

or  of  the  officer  appointing  them. 

Each  of  the  salaried  officers  of  the  corporation  shall  devote 
his  entire  time,  skill  and  energy  to  the  business  of  the  corpora- 
tion, unless  the  contrary  is  expressly  consented  to  by  the  Board 
of  Directors  or  the  Finance  Committee.  No  vacation  shall  be 
taken  by  any  such  officers  except  by  consent  of  the  Board  of 
Directors  or  the  Finance  Committee. 

The  Finance  Committee  shall  have  power  to  remove  all 
officers,  agents  and  employees  of  the  Company, 
except  officers  elected  or  appointed  by  the  Board 
of  Directors. 

Section  2.  Powers  and  Duties  of  the  Chairman  of  the  Board. 
The  Chairman  of  the  Board  of  Directors  shall  be  the  chief  execu- 
Chairman  ^^^®  officer  of  the  corporation  and,  subject  to  the 
Powers  and  Board  of  Directors  and  Finance  Committee,  shall 
Duties.  be  in  general  charge  of  the  affairs  of  the  corpora- 

tion. He  shall  preside  at  all  meetings  of  the  stockholders  and  of 
the  Board  of  Directors;  and  by  virtue  of  his  office  shall  be  a 
member  of  the  Finance  Committee. 

Section  3.  Poivers  and  Duties  of  the  President.  In  the  ab- 
sence of  the  Chairman  of  the  Board  and  the  Chairman  of  the 
President  Finance  Committee,  the  President  shall  preside  at 
Powers  and  all  meetings  of  the  stockholders  and  of  the  Board  of 
Duties.  Directors.    Subject  to  the  Board  of  Directors  and 

the   Finance   Committee,  he  shall   have   general   charge   of  the 


SECURITIES-ISSUING    ORGANIZATIONS     513 

business  of  the  corporation  relating  to  manufacturing,  mining 
and  transportation  and  general  operation.  He  shall  keep  the 
Board  of  Directors  and  the  Finance  Committee  and  the  Chair- 
man of  the  Board  and  the  Chairman  of  the  Finance  Committee 
fully  informed,  and  shall  freely  consult  them  concerning  the 
business  of  the  corporation  in  his  charge.  He  may  sign  and 
execute  all  authorized  bonds,  contracts,  checks  or  other  obliga- 
tions in  the  name  of  the  corporation,  and  with  the  treasurer  or 
an  assistant  treasurer  may  sign  all  certificates  of  the  shares  in 
the  capital  stock  of  the  corporation.  He  shall  do  and  perform 
such  other  duties  as  from  time  to  time  may  be  assigned  to  him 
by  the  Board  of  Directors. 

Section  4.     Vice-Presidents.     The   Board   of   Directors   may 
appoint  a  vice-president  or  more  than  one  vice-president.    Each 
vice-president   shall   have   such   powers,   and   shall 
p '^^T,     ,         perform  such  duties,  as  may  be  assigned  to  him 
by  the  Board  of  Directors  or  the  Finance  Committee. 
Section  5.     The  General  Counsel.    The  General  Counsel  shall 
be  the  chief  consulting  officer  of  the  Company  in  all  legal  mat- 
ters, and  subject  to  the  Board  of  Directors  and  the 
General  Finance  Conmiittee,  shall  have  general  control  of 

all  matters  of  legal  import  concerning  the  Company. 
Section  6.    Powers  and  Duties  of  Treasurer.    The  Treasurer 
shall  have  the  custody  of  all  the  funds  and  securities  of  the  Com- 
Treasurer        P^"y  which  may  have  come  into  his  hands;  when 
Powers  necessary  or  proper  he  shall  endorse  on  behalf  of 

and  Duties.  ^]^p  Company,  for  collection,  checks,  notes  and  other 
obligations,  and  shall  deposit  the  same  to  the  credit  of  the  Com- 
pany in  such  bank  or  banks  or  depositary  as  the  Board  of  Direc- 
tors or  the  Finance  Committee  may  designate;  he  shall  sign  all 
receipts  and  vouchers  for  payments  made  to  the  Company; 
jointly  with  such  other  officer  as  may  be  designated  by  the 
Finance  Committee,  he  shall  sign  all  checks  made  by  the  Com- 
pany, and  shall  pay  out  and  dispose  of  the  same  under  the 
direction  of  the  Board  or  of  the  Finance  Committee;  he  shall 
sign  with  the  President,  or  such  other  person  or  persons  as  may 
be  designated  for  the  purpose  by  the  Board  of  Directors  or  the 
Finance  Committee,  all  bills  of  exchange  and  promissory  notes 
of  the  Company;   he  may  sign,  with  the  President  or  a  Vice- 


514  SUPPLEMENTARY    FORMS 

President,  all  certificates  of  shares  in  the  capital  stock;  whenever 
required  by  the  Board  of  Directors  or  by  the  Finance  Commit- 
tee, he  shall  render  a  statement  of  his  cash  account;  he  shall 
enter  regularly,  in  books  of  the  Company  to  be  kept  by  him 
for  the  purpose,  full  and  accurate  account  of  all  moneys  received 
and  paid  by  him  on  account  of  the  Company;  he  shall,  at  all 
reasonable  times,  exhibit  his  books  and  accounts  to  any  direc- 
tor of  the  Company  upon  application  at  the  office  of  the  Com- 
pany during  business  hours;  and  he  shall  perform  all  acts  inci- 
dent to  the  position  of  treasurer,  subject  to  the  control  of  the 
Board  of  Directors  or  of  the  Finance  Committee. 

He  shall  give  a  bond  for  the  faithful  discharge  of  his  duties 
in  such  sum  as  the  Board  of  Directors  or  the  Finance  Com- 
mittee may  require. 

Section  7.     Assistant    Treasurers.     The  Board   of   Directors 

or  the  Finance  Committee  may  appoint  an  assistant  treasurer 

or  more  than  one  assistant  treasurer.    Each  assist- 

Assistant         ^^-^^    treasurer   shall    have   such    powers    and    shall 

perform  such  duties  as  may  be  assigned  to  him  by 

the  Board  of  Directors,  or  by  the  Finance  Committee. 

Section  8.  Powers  and  Duties  of  Secretary.  The  Secre- 
tary shall  keep  the  minutes  of  all  meetings  of  the  Board  of  Direc- 
Secretarv  *°^'  ^^^^^  ^^^^  minutes  of  all  meetings  of  the  stock- 
Powers  holders,  and  also  (unless  otherwise  directed  by  the 
and  Duties.  Finance  Committee)  the  minutes  of  all  committees, 
in  books  provided  for  that  purpose;  he  shall  attend  to  the  giv- 
ing and  serving  of  all  notices  of  the  Company;  he  may  sign  with 
the  president  in  the  name  of  the  Company  all  contracts  authorized 
by  the  Board  of  Directors  or  by  the  Finance  Committee,  and, 
when  so  ordered  by  the  Board  of  Directors  or  the  Finance  Com- 
mittee, he  shall  affix  the  seal  of  the  Company  thereto;  he  shall 
have  charge  of  the  certificate  books,  transfer  books  and  stock 
ledgers,  and  such  other  books  and  papers  as  the  Board  of  Direc- 
tors or  the  Finance  Committee  may  direct,  all  of  which  shall,  at 
all  reasonable  times,  be  open  to  the  examination  of  any  director, 
upon  application  at  the  office  of  the  Company  during  business 
hours;  and  he  shall  in  general  perform  all  the  duties  incident  to 
the  office  of  secretary,  subject  to  the  control  of  the  Board  of 
Directors  and  of  the  Finance  Committee.    The  offices  of  Secre- 


SECURITIES-ISSUING    ORGANIZATIONS     515 

tary  and  of  Treasurer  may  be  held  by  one  and  the  same  person. 

Section   9.     Assistant  Secretaries.     The  Board  of  Directors 

or  the  Finance  Committee  may  appoint  one  assistant  secretary 

or  more  than  one  assistant  secretary.  Each  assis- 
Assistant         ^^^^^   secretary  shall   have  such   powers   and   shall 

perform  such  duties  as  may  be  assigned  to  him  by 
the  Board  of  Directors  or  by  the  Finance  Committee. 

Section  10.    Comptroller.    The  Comptroller  shall  be  the  prin- 
cipal officer  in  charge  of  the  accounts  of  the  Company,  and  shall 

perform   such   duties   as   from   time   to   time   may 

be  assigned  to  him  by  the  Board  of  Directors  or 
the  Finance  Committee. 

Section  11.     Voting  upon  Stocks.     Unless  otherwise  ordered 
by  the  Board  of  Directors  or  by  the  Finance  Committee,  the 

Chairman  of  the  Board  or  the  Chairman  of  the 
Stockf  "^°"  Finance  Committee  shall,  have  full  power  and 
owned  in  authority  in  behalf  of  the  Company  to  attend 
other      _  jjj-,fj  iq  ^q^  jjj-,(^j  ^q  yQ^g  .^^  ^^y  meetings  of  stock- 

Companies.      ,    ,  ,  ,  .        .",.,,      ^ 

holders  oi  any  corporation  in  which  the  Company 

may  hold  stock,  and  at  any  such  meeting  shall  possess  and  may 
exercise  any  and  all  the  rights  and  powers  incident  to  the  owner- 
ship of  such  stock,  and  which,  as  the  owner  thereof,  the  Company 
might  have  possessed  and  exercised  if  present.  The  Board  of 
Directors  or  the  Finance  Committee,  by  resolution,  from  time 
to  time,  may  confer  like  powers  upon  any  other  person  or 
persons. 

Article   V 

CAPITAL   STOCK-SEAL 

Section  1.  Certificates  of  Shares.  The  certificates  for  shares 
of  the  capital  stock  of  the  Company  shall  be  in  such  form,  not 
inconsistent  with  the  certificate  of  incorporation,  as 
Certificates  ^^^^^^  ^®  prepared  or  be  approved  by  the  Board  of 
Directors.  The  certificates  shall  be  signed  by  the 
president  or  a  vice-president,  and  also  by  the  treasurer  or  an 
assistant  treasurer. 

All  certificates  shall  be   consecutively  nimibered.     The  name 
of  the  person  owning  the  shares  represented  thereby,  with  the 


516  SUPPLEMENTARY    FORMS 

number  of  such  shares  and  the  date  of  issue,  shall  be  entered 
on  the  Company's  books. 

No  certificate  shall  be  valid  unless  it  is  signed  by  the  president 
or  a  vice-president,  and  by  the  treasurer  or  an  assistant-treasurer. 
All  certificates  surrendered  to  the  Company  shall  be  canceled, 
and  no  new  certificate  shall  be  issued  until  the  former  certificate 
for  the  same  number  of  shares  of  the  same  class  shall  have  been 
surrendered  and  canceled. 

Section  2.     Transfer  oj  Shares.    Shares  in  the  capital  stock 

of  the  Company  shall  be  transferred  only  on  the  books  of  the 

Company  by  the  holder  thereof  in  person,  or  by 

Transfer  of    j^jg   attorney,   upon  surrender   and   cancellation  of 

certificates  for  a  like  number  of  shares. 

Section   3.     Regulations.     The  Board  of  Directors,  and  the 

Finance  Committee  also,  shall  have  power  and  authority  to  make 

all  such  rules  and  regulations  as  respectively  they 

may  deem  expedient,  concerning  the  issue,  transfer 

and  registration  of  certificates  for  shares  of  the  capital  stock  of 

the  Company. 

The  Board  of  Directors  or  the  Finance  Committee  may  ap- 
Transfer  point  a  transfer  agent  and  a  registrar  of  transfers, 

Agent.  and  may  require  all  stock  certificates  to  bear  the 

Registrar.        signature  of  such  transfer  agent  and  of  such  regis- 
trar of  transfers. 

Section  4.  Closing  of  Transfer  Books.  The  stock  transfer 
books  shall  be  closed  for  the  meetings  of  the  stockholders,  and 
Closine  of  ^^^  ^^^  payment  of  dividends,  during  such  periods 
Transfer  as  from  time  to  time  may  be  fixed  by  the  Board  of 

Books.  Directors  or  by  the  Finance  Committee,  and  dur- 

ing svich  periods  no  stock  shall  be  transferable. 

Section   5.     Dividends.     The   Board   of   Directors   may   de- 
.  clare  dividends  from  the  surplus  or  from  the  net 

profits  of  the  Corporation. 
The  dates  for  the  declaration  of  dividends  upon  the  preferred 
stock  and  for  the  declaration  of  regular  dividends  upon  the  com- 
mon stock  shall  be  the  days  by  these  by-laws  fixed 
Dates  for        f^j,  ||^^  regular  monthlv  meetings  of  the  Board  of 
Declaration.     _ .  .      ,  ,        r  .      •,    t  ,      ^      ,  , 

Directors  in  the  months  of  April,  July,  October  and 

January  in  each  year,  on  which  days  the  Board  of  Directors  in 


SECURITIES-ISSUING    ORGANIZATIONS     517 

its  discretion  shall  declare  what,  if  any,  dividends  shall  be  de- 
clared upon  the  preferred  stock  and  the  common  stock  or  either 
of  such  stocks;  but  upon  any  day  by  these  by-laws  fixed  for  a 
regular  meeting  of  the  Board  of  Directors  in  any  month 
or  upon  any  day  upon  which  a  special  meeting  of  the  Board  of 
Directors  shall  be  held  in  accordance  with  the  provisions 
of  these  by-laws,  the  Directors  may  declare  an  extra  dividend 
on  the  common  stock  of  the  Corporation  out  of  the  surplus 
or  net  profits  of  the  Corporation  existing  at  the  end  of  the 
last  quarter  for  which  a  full  dividend  upon  the  preferred  stock 
was  declared,  provided  all  cumulative  dividends  upon  the 
preferred  stock  for  all  previous  years  shall  have  been  declared 
and  shall  have  become  payable,  and  the  accrued  quarterly  instal- 
ments for  the  current  year  shall  have  been  declared  and  the  Cor- 
poration shall  have  paid  such  cumulative  dividends  for  previous 
years  and  such  accrued  quarterly  instalments,  or  shall  have  set 
aside  from  its  surplus  or  net  profits  a  sum  sufficient  for  the  pay- 
ment thereof. 

The  dividends  upon  the  preferred  stock,  if  declared,  sever- 
Pref erred-  ^^^^  ^"*^  respectively,  shall  be  payable  quarterly 
when  '  upon  the  day  preceding  the  last  day  of  May,  of 
payable.  August,    of    November   and    of   February   in   each 

year. 

The  dividends  upon  the  common  stock,  if  declared  upon  the 
days  fixed  by  these  by-laws  for  the  declaration  of  regular  divi- 
Common-  dends  upon  the  common  stock,  severally  and 
when  '  respectively,  shall  be  payable  quarterly  on  the  day 
payable.  preceding  the  last  day  of  June,  of  September,  of 

December  and  of  March  in  each  year;  and  if  any  extra  dividends 
shall  be  declared  at  any  other  time,  they  shall  be  payable  upon 
such  date  or  dates  as  may  be  determined  by  the  Board  of 
Directors. 

If  the  date  herein  appointed  for  the  payment  of  any  dividends 

shall  in  any  year  fall  upon  a  legal  hohday,  then 

J"®,?^^  the   dividends    payable   upon   such    date    shall   be 

holiday.  .  ,  ,        ^    -^  ,.       ,  ,      ,  i    ,•  i 

paid  upon  the  next  preceding  day  not  a  legal  hohday. 

Section  6.  Working  Capital.  The  directors  shall  not  be  re- 
quired in  January  in  each  year,  after  reserving  over  and  above 
its  capital  stock  paid  in,  as  a  working  capital  for  said  corpora- 


518  SUPPLEMENTARY    FORMS 

tion,  such  sum,  if  any,  as  shall  have  been  fixed  by  the  stockholders, 
to  declare  a  dividend  among  its  stockholders  of  the  whole  of  its 

accumulated  profits  exceeding  the  amount  so  re- 
Workmg  served,  and  pay  the  same  to  such  stockholders  on 

demand;  but  the  Board  of  Directors  may  fix  a 
sum  which  may  be  set  aside  or  reserved,  over  and  above  the 
Company's  capital  paid  in,  as  a  working  capital  for  the  Com- 
pany, and  from  time  to  time  they  may  increase,  diminish  and 
vary  the  same  in  their  absolute  judgment  and  discretion. 

Section   7.     Corporate  Seal.     The  Board  of  Directors  shall 
provide  a  suitable  seal,  containing  the  name  of  the  Company, 

which  seal  shall  be  in  charge  of  the  secretary.  If 
Corporate        r^y^^  when  so  directed  by  the  Board  of  Directors  or 

by  the  Finance  Committee,  a  duplicate  of  the  seal 
may  be  kept  and  be  used  by  the  treasurer  or  by  any  assistant 
secretary  or  assistant  treasurer. 


Article  VI 

AMENDMENTS 

Section    1.     The   Board   of   Directors   shall   have   power  to 

make,  amend  and  repeal  the  By-Laws  of  the  Company,  by  vote 

of  a  majority  of  all  of  the  Directors,  at  any  regular 

Amend-  qj.   special   meeting    of   the    Board,   provided   that 

ments.  .  .  .  .  .  ,  ,, 

notice  or  intention  to  make,  amend  or  repeal  the 

By-Laws  in  whole  or  in  part  shall  have  been  given  at  the  next 

preceding  meeting;    or  without  any  such  notice,  by  a  vote  of 

two-thirds  of  all  the  directors. 

Voting  Trusts.  —  The  forms  nccessar^'^  for  the  organiza- 
of  a  stockholders'  voting  trust  are  the  trust  agreement  and 
the  voting  trustees'  certificates.  A  single  specimen  of  each 
of  these  is  here  reproduced. 


SECURITIES-ISSUING    ORGANIZATIONS     519 

FORM   30 

VOTING   TRUST   AGREEMENT  i 

We,  the  Undersigned,  stockholders  of  the  Glen  Harbor  Im- 
provement Company,  a  corporation  duly  organized  under  the 
laws  of  the  State  of  New  York,  and  having  its  principal  office  in 
the  City  of  Yonkers,  in  the  State  of  New  York,  do  hereby,  in 
consideration  of  the  premises  and  of  our  mutual  undertakings 
as  herein  set  forth,  severally  agree  to  transfer  and  deliver  the 
shares  of  stock  held  by  each  of  us  in  said  corporation,  to  Emmett 
M.  Brown,  William  Swift,  and  Andrew  McBride,  all  of  the  said 
City  of  Yonkers,  as  Voting  Trustees  hereunder,  and  mutually 
agree  with  them  and  with  each  other  that  said  Trustees  shall  hold 
and  vote  the  said  stock  for  the  period  of  five  years  from  the 
date  hereof,  for  the  purpose  and  under  the  following  terms  and 
conditions : 

1.  All  stockholders  of  the  said  Company  may  join  in  the 
voting  trust  hereby  created,  by  signing  this  present  agreement 
and  transferring,  in  whole  or  in  part,  the  shares  of  stock  held  by 
them  in  said  Company  to  the  said  Trustees,  under  the  conditions 
and  for  the  purposes  of  this  present  agreement. 

2.  Each  stockholder  in  said  Company  joining  this  voting  trust 
as  afore  provided  shall  become  a  party  thereto  from  the  date  on 
which  stock  owned  by  such  stockholder  in  said  Company  shall 
be  transferred  and  delivered  to  said  Trustees  for  the  purposes 
of  this  agreement. 

3.  The  said  Trustees  shall  surrender  to  the  proper  officer  of 
the  said  Glen  Harbor  Improvement  Company,  for  cancellation, 
the  certificates  for  all  shares  of  stock  transferred  to  said  Trustees, 
and  shall,  in  place  thereof,  have  certificates  of  said  Company 
issued  to  themselves  as  Trustees,  and  on  the  face  of  each  said 
Trustees'  certificate  shall  be  stated  the  fact  that  such  certificate 
has  been  issued  pursuant  to  this  agreement. 

4.  The  said  Trustees  shall  collect  and  receive  all  dividends  and 

1  From  Conyngton,  Corporate  Organization  and  Management, 
pp.  606-607. 


520  SUPPLEMENTARY    FORMS 

profits  accruing  to  said  stock  and  shall  pay  over  the  same  to  the 
respective  owners  thereof. 

5.  The  said  Trustees  shall  issue  to  each  stockholder  becoming 
a  party  thereto  one  or  more  transferable  Trustees'  receipts  for 
the  number  of  shares  of  stock  placed  by  each  of  said  stockholders 
respectively  in  this  voting  trust,  and  when  such  Trustees'  receipts 
are  duly  transferred  to  other  parties,  said  Trustees  shall  recognize 
such  other  parties  as  the  lawful  assigns  and  successors  of  the 
original  parties  hereto,  entitled  to  all  of  their  rights  in  the 
premises. 

6.  The  stock  held  under  this  agreement  shall,  except  as  herein- 
after specially  provided,  be  voted  at  any  meeting  of  the  stock- 
holders of  said  Company  by  such  of  the  said  Trustees  as  may  be 
present  thereat,  and  said  vote  shall  be  cast  as  in  the  judgment 
of  a  majority  of  the  said  Trustees  present  at  any  such  meetings 
may  be  for  the  best  interest  of  the  stockholders  subscribing  to 
this  agreement. 

7.  In  all  elections  of  Directors  the  said  stock  shall  be  voted 
for  the  re-election  of  the  present  members  of  the  Board  of 
Directors  of  said  Company,  or,  in  the  event  of  death,  disability, 
or  refusal  to  serve  of  any  such  members,  the  said  stock  shall  be 
voted  for  such  other  person  or  persons  as,  in  the  judgment  of 
said  Trustees,  shall  be  the  most  suitable  for  such  office. 

8.  This  agreement  shall  terminate  five  years  from  the  date 
hereof,  and  upon  such  termination  the  said  Trustees  shall,  as 
the  outstanding  Trustees'  receipts  are  surrendered  to  them,  duly 
indorsed,  give  over  to  the  said  Company  the  certificates  of  stock 
held  by  said  Trustees,  in  pursuance  of  this  agreement,  properly 
indorsed,  and  shall  direct  the  officers  of  said  Company  to  deliver 
to  the  respective  owners  of  the  said  surrendered  Trustees'  receipts 
certificates  for  such  numbers  of  shares  of  stock  as  may  be  neces- 
sary to  satisfy  the  requirements  of  the  said  surrendered  Trustees' 
receipts. 

9.  In  the  event  of  the  death,  disability,  resignation,  or  refusal 
to  act  of  any  of  the  Trustees  herein  named,  the  remaining  Trus- 
tees, or  Trustee,  shall  have  power  to  suitably  fill  such  vacancy 
or  vacancies,  and  the  person  or  persons  so  appointed  shall  be 
empowered  and  authorized  to  act  hereunder  in  all  respects  as  if 
originally  named  herein. 


SECURITIES-ISSUING    ORGANIZATIONS     521 

10.  A  duplicate  of  this  agreement  shall  be  filed  in  the  principal 
office  of  the  said  Company  in  Yonkers  and  shall  there  be  kept  for 
the  inspection  of  any  Stockholder  of  the  Company,  daily,  during 
business  hours. 

In  Testimony  Whereof,  the  parties  to  this  agreement  have 
hereunto  affixed  their  hands  and  seals  in  the  said  City  of 
Yonkers  this  27th  day  of  February,  1917. 

Shares 
Voting  Trustees  Stockholders  Transferred 

Emmett  M.  Brown  (L.  S.)  James  Halsey  (L.  S.)         50 

William  Swift  (L.  S.)  Ernest  Jurgens         (L.  S.)        125 

Andrew  McBride     (L.  S.)  Harold  M.  Gilsey   (L.  S.)         75 

Willis  M.  Ames        (L.  S.)         75 


FORM  31 

VOTING  TRUSTEES'  CERTIFICATE 

Organized  Under  the  Laws  of  the  State  of  New  York 

Number Shares 

Consolidated  Clothing  Company 
Capital  Stock  $500,000 

Certificate  for  Stock  Deposited  Under  Voting  Trust 
Agreement  of  June  8,  1921. 

H.  B.  Smith,  Max  Engels,  and  William  J.  Friedman,  Trustees, 
by  the  Trust  Company,  their  agent,  having  re- 
ceived on  deposit  the  entire  capital  stock  of  the  Consolidated 
Clothing  Company,  full-paid  and  non-assessable,  all  being  held 
under  the  above-named  agreements,  to  the  terms  of  which  the 
holder  hereof  assents  by  receiving  this  certificate,  certify  that 
is  entitled,  subject  to  the  provisions  of  said  Agree- 
ment, to  Fifty  Shares  of  the  stock  deposited  thereunder.  This 
certificate  entitles  the  holder  to  all  rights,  dividends  and  privi- 
leges belonging  to  the  actual  stock,  excepting  only  the  right  to 


522  SUPPLEMENTARY    FORMS 

vote.  The  Trusteeship  herein  agreed  to  may  be  terminated  after 
three  years  upon  the  terms  set  forth  in  the  above  named  agree- 
ment and  is  ended  by  hmitation  in  five  years  from  date  of  agree- 
ment. 

Transferable   only   on  the   books   of   the   undersigned   at   the 

office  of  the  Trust  Company,  New  York  City,  by 

the  holder  hereof  in  person  or  by  duly  authorized  attorney, 
upon  surrender  of  this  certificate  properly  indorsed. 

(Dated)  H.  B.  Smith 

Max  Engels 
William  J.  Friedman, 

Trustees 

By  Trust  Company, 

Depositary  and  Agent, 
By  A.  0.  Henry,  Secretary. 

The  assignment  on  the  back  of  the  certificate  should  read 
about  as  follows: 

For  value  received,  I  hereby  sell,  assign,  and  transfer  to 
the  interest  in  the  stock  of  the  Consolidated  Cloth- 
ing Company  represented  by  the  within  certificate,  and  do  hereby 

irrevocably  constitute  and  appoint my  attorney  to 

transfer  the  said  interest  on  the  liooks  of  the  within  named 
Trustees  with  full  power  of  substitution  in  the  premises. 

(Date)  (Signature) 


Meetings  of  Stockholders  and  Directors.  —  It  is  import- 
ant that  there  be  no  irregularity  in  the  way  in  which 
meetings  of  stockholders  or  directors  have  been  called  and 
notified,  otherwise  the  action  taken  at  such  meetings  may 
be  held  to  be  invalid  and  not  binding  upon  the  corporation. 
The  ordinary  rule  is  that  the  stockholders  and  directors 
must  be  notified  of  any  meeting  that  has  been  called  a 
certain  minimum  number  of  days  in  advance  of  the  time 
set  for  the  meeting.  In  the  case  of  special  meetings  it  is 
also  necessary  to  include  in  the  notice  a  statement  of  all 


SECURITIES-ISSUING    ORGANIZATIONS     523 

matters  or  questions  that  are  to  come  up  for  consideration. 
Meetings  may,  of  course,  be  called  and  notice  waived  by 
consent  of  all  the  members  of  the  body.  This  method  is 
commonly  used  in  calling  the  first  meeting  of  stockholders 
and  directors  upon  organizing  a  corporation.  The  follow- 
ing forms  are  illustrative  of  these  points. 


FORM  32 

CALL  AND  WAIVER  TO  BRING  TOGETHER  FIRST 
MEETING  OF  STOCKHOLDERS 

We,  the  undersigned,  being  all  of  the  incorporators  and  stock- 
holders of  the  Fit-Well  Clothing  Company,  do  hereby  call  the 
first  meeting  of  the  stockholders  thereof,  to  be  held  in  the  office 
of  H.  Lyon,  37  Wall  Street,  New  York  City,  June  16,  1921,  at 
10  o'clock  A.M.,  for  the  organization  of  the  company  and  the 
transaction  of  all  such  business  as  may  be  incident  thereto,  and 
we  hereby  waive  all  requirements  as  to  notice  of  such  meeting 
and  consent  to  the  transaction  thereat  of  any  and  all  business 
pertaining  to  the  affairs  of  the  company. 

Julius  Goldstein 
Max  Engels 
William  J.  Friedman 

A.  L.  ROBBINS 

New  York,  June  16,  1921.  John  Golden 

In  states  that  do  not  require  the  directors  for  the  first 
year  to  be  named  in  the  charter,  the  call  and  waiver  for  the 
first  meeting  of  stockholders  usually  sets  forth  the  purposes 
as  follows: 

"  for  the  purpose  of  receiving  charter,  electing  directors,  adopting 
by-laws  and  the  transaction  of  such  other  business  as  may  be 
incident  or  necessary  to  the  organization  of  the  company." 

The  call  and  waiver  for  first  meetings  of  directors  is 
similar  to  the  above  except  in  the  statement  of  purposes 
which  are  usually  given  somewhat  as  follows: 


524  SUPPLEMENTARY    FORMS 

"  for  the  purpose  of  electing  officers  of  the  company,  acting  upon 
a  proposition  to  exchange  stock  for  property,  and  doing  all  such 
other  things  as  may  be  necessary  or  desirable  in  connection  with 
the  organization  of  the  company  or  for  the  promotion  of  its 
business." 


FORM  33 

NOTICE  OF  REGULAR  OR  ANNUAL  MEETING  OF 
STOCKHOLDERS 

Manhattan  Railway  Company, 
No.  165  Broadway,  New  York. 

The  Annual  Meeting  of  the  Shareholders  of  the  Manhattan 
Railway  Company  will  be  held  at  the  Company's  office,  No.  165 
Broadway,  Manhattan  Borough,  New  York  City,  on  Wednesday, 
November  10th,  1920,  at  12  o'clock  Noon. 

A  Board  of  Directors  for  the  ensuing  year  is  to  be  elected,  and 
three  Inspectors  of  Election. 

The  transfer  books  will  not  close. 

Alfred  Skitt,  President. 
P.  V.  Traique,  Asst.  Secretary. 
October  7th,  1920. 

The  above  is  the  simplest  form  of  notice  that  can  be 
used.  It  is,  however,  quite  common  to  state  the  qualifica- 
tions of  voters  somewhat  more  definitely  than  in  this  case. 
For  example,  a  notice  to  the  stockholders  of  the  Gulf  States 
Steel  Company  contains  the  following: 

"  The  books  for  the  transfer  of  the  stock  of  the  Company  mil 
not  be  closed,  but  no  stock  can  be  voted  at  said  meeting  which 
shall  have  been  transferred  on  the  books  of  the  Company  during 
the  period  of  twenty  days  prior  to  said  meeting." 

The  Illinois  Central  Railroad  Company,  in  closing  its 
stock  transfer  books  before  an  election  gives  notice  of  this 
to  stockholders  in  the  call  and  notice. 


SECURITIES-ISSUING    ORGANIZATIONS     525 

"  For  the  purpose  of  the  Annual  Meeting  of  Stockholders  of 
the  Illinois  Central  Railroad  Company,  to  be  held  at  Chicago,  111., 
on  Wednesday,  April  20,  1921,  the  Stock  Transfer  Books  will 
be  closed  at  3  p.m.  on  Wednesday,  April  6,  1921,  and  will  remain 
closed  until  the  morning  of  Thursday,  April  21,  1921. 

Special  matters  of  considerable  importance,  but  some- 
what outside  of  the  ordinary  run  of  affairs,  are  usually 
mentioned  in  the  notice  to  stockholders  if  they  are  to  be 
brought  up  at  the  meeting. 


Special  meetings  of  stockholders  may  be  called  (1)  by 
the  chief  executive  officers  of  the  company,  usually  the 
president  and  the  secretary,  (2)  by  a  stated  per  cent  of  the 
stockholders,  (3)  by  all  of  the  stockholders  by  means  of  a 
call  and  waiver  of  notice  or  (4)  by  resolution  of  the 
directors.  In  any  event  the  notice  and  call  must  state  fully 
the  purpose  of  the  meeting,  and  no  matters  other  than 
those  enumerated  in  the  notice  and  call  may  be  considered. 


FORM  34 

PRESIDENT'S   CALL   FOR   SPECIAL   MEETING   OF 
STOCKHOLDERS 
Mr.  L.  Landau, 
Secretary  of  the  Liberty  Merchandise  Co.,  Inc. 
You  are  hereby  authorized  and  directed  to  send  out  notice 
of  a  special  meeting  of  the  Stockholders  of  this  Company,  hereby 
called  by  me,  said  meeting  to  be  at  No.  106  Forsyth  St.,  New 
York  City,  on  the  ISth  day  of  November,  1920,  at  10  o'clock  a.m., 
lor  the  purpose  of  considering  and  acting  upon  a  proposition  to 
increase  the  capital  stock  from  $12,500  to  $50,000,  at  $25.00  a 
share,  and  for  the  transaction  of  any  and  all  business  in  connec- 
tion therewith  that  may  properly  come  before  said  meeting. 
(Date)  J.  Silverman, 

President. 


526  SUPPLEMENTARY    FORMS 

The  Secretary  will  thereupon  send  out  a  notice  as 
follows: 

Liberty  Merchandise  Co.,  Inc. 
295  Broome  St. 

Notice  is  hereby  given  to  all  the  stockholders  of  the  above 
corporation  that  a  special  meeting  will  take  place  on  the  ISth 
day  of  November,  at  106  Forsyth  St.,  New  York  City,  at  10 
o'clock  A.M.  for  the  purpose  of  considering  a  proposition  to  in- 
crease the  capital  stock  of  the  Company  from  $12,500  to  $50,000, 
at  $25.00  a  share  and  for  the  transaction  of  any  and  all  business 
in  connection  therewith  that  may  properly  come  before  said 
meeting. 

J.  Silverman,  Pres. 

L.  Landau,  Secy. 


FORM  35 
STOCKHOLDERS'   REQUEST   FOR   SPECIAL   MEETING 

To  the  Secretary  of  the 

A B Co. 

We,  the  undersigned,  stockholders  of  the  A B 

Company  owning  and  controlling  not  less  than  two-thirds  {or 
such  amount  as  the  by-laws  may  provide)  of  its  entire  voting 
stock,  do  hereby  call  a  special  meeting  of  the  stockholders  of  the 

Company  to  be  held  at at o'clock,  on day 

of ,  19 .... ,  for  the  purpose  of  

(Date)  Names  Shares  Owned. 


The  formal  notice  is  thereupon  sent  out  by  the  secretary. 


SECURITIES-ISSUING    ORGANIZATIONS     527 


FORM  36 

SPECIAL  MEETING  OF  STOCKHOLDERS  BY  CALL  AND 

WAIVER 

• 

We,  the  undersigned,  being  all  the  stockholders  of  the  A 

B Company,  hereby  call  a  special  meeting  of  the  stock- 
holders of  said  Company  to  be  held  in  the  Company's  offices  at 

,  on  day  of  ,  1921,  at   o'clock,  for 

the  purpose  of  considering  (etc.) 

(Date)  (Signed   by   all   stockholders   in   person 

or  proxy). 

A  special  meeting  by  call  and  waiver  is,  of  course,  useful 
only  where  the  number  of  stockholders  is  small,  conse- 
quently it  is  seldom  used  by  large  corporations. 


FORM  37 

DIRECTORS'  RESOLUTION  FOR  SPECIAL  MEETING 

Be  It  Resolved,  That  a  special  meeting  of  the  stockholders  of 
this  Company  be  and  hereby  is  called,  said  meeting  to  be  held 

in  the  offices  of  the  Company  at  on  the  day  of 

,  1921,  at o'clock  for  the  purpose  of  (etc.) 

In  all  cases,  except  where  the  meeting  is  by  call  and 
waiver,  the  secretary  sends  out  the  official  notice  similar  to 
that  given  in  Form  34. 

Special  meetings  of  directors  may  be  called  by  the  presi- 
dent of  the  company  or  chairman  of  the  board  of  directors, 
by  a  stated  number  of  the  directors  themselves,  or  by  call 
and  waiver  of  all  of  the  directors.  The  forms  differ  little 
from  those  pertaining  to  special  meetings  of  the  stock- 
holders. 


528  SUPPLEMENTARY    FORMS 

Proxies  may  be  given  by  stockholders  to  others  to 
represent  them  and  to  vote  their  stock  at  meetings.  They 
may  be  (1)  general  in  their  authority  and  unlimited  as  to 
time,  (2)  limited  as  to  time  and  general  in  authority,  and 
(S)  limited  in  both  respects.  They  must  bear  a  government 
re  /enue  stamp  to  be  valid. 


FORM  38 
GENERAL  AND  UNLIMITED  PROXY 

I,  hereby  appoint  Benjamin  M.  Squires  my  proxy  with  full 
authority  to  vote  for  me  and  in  my  place  at  any  and  all  stock- 
holders' meetings  of  the  Urban  Motion  Picture  Industries,  Inc. 

Witness  my  hand  and  seal  this  7th  day  of  October,  1920. 

A.  H.  Stockder  (L.  S.) 
Witnessed  by 
G.  A.  Betz. 

Where  the  proxy  is  to  be  limited  in  any  particular,  such 
limitation  must  be  clearly  set  forth  in  the  grant  of 
authority.  In  such  cases  it  is  usually  somewhat  more 
formal.  When  a  corporation  designates  someone  as  proxy 
to  vote  in  meetings  of  stockholders  of  a  corporation  whose 
stock  it  holds,  the  proxy  must  bear  the  official  signature 
and  seal  of  the  corporation  appointing  the  proxy. 


FORM  39 
REVOCATION  OF  PROXY 

Know  All  Men  By  These  Presents: 

That  I,  the  undersigned,  do  hereby  revoke  and  annul  any  and 
all  proxies  or  powers  of  attorney  heretofore  given  by  me, 
authorizing  or  empowering  any  person  or  persons  to  represent 
me,  or  vote  for  me  or  in  my  name  or  stead  or  act  for  me  in  any 


SECURITIES-ISSUING    ORGANIZATIONS     529 

way  whatsoever  at  any  meeting  or  meetings  of  the  stockholders  of 

the  A B Corporation. 

Witness  my  hand  and  seal  this day  of ,  1921. 


In  the  presence  of  Signature   (L.  S.) 


Election  Forms.  —  In  holding  elections  of  directors,  and 
officers  of  the  corporation  it  is  essential  that  the  whole 
procedure  conform  in  all  respects  to  statutory,  charter  and 
by-law  requirements.  In  New  York  and  other  states  an 
oath  is  prescribed  for  inspectors  of  election  and  also  a  form 
of  an  inspectors'  certificate  of  election. 


FORM  40 

OATH  OF  INSPECTORS  OF  ELECTION 

State  of  New  York,  County  of  New  York,  ss: 
We,  the  undersigned,  duly  appointed  to  act  as  inspectors  of 

election  at  the  annual  meeting  of  stockholders  of  the 

Company,  No Street,  in  the  City  of  New  York,  on  the 

day  of 19.  ... ,  being  severally  sworn,  depose 

and  say,  and  each  for  himself  deposes  and  says,  that  he  will 
faithfully  execute  the  duties  of  inspector  of  election  at  such  meet- 
ing with  strict  impartiality  and  according  to  the  best  of  his 
abihty. 

John  Smith 
William  James 

Subscribed  and  severally  sworn  to  before  me  this day 

of 19 

(Notarial  Seal)  Alfred  Marsh, 

Notary  Public. 


530  SUPPLEMENTARY    FORMS 

FORM   41 
INSPECTORS'  CERTIFICATE  OF  ELECTION 

The  undersigned  inspectors  of  election,  duly  appointed  and 
qualified,  do  hereby  certify  that  at  the  regular  annual  meeting 

of  stockholders  of  the Company,  held  at  the  office  of  said 

company,  No Street,  New  York,  on  the  ....   day  of 

. . . .,  19. . . .,  a  quorum  being  present,  we,  after  being  first  duly 
sworn  by  oath  hereto  annexed,  did  conduct  the  election  for 
directors  of  said  corporation,  and  that  the  vote  taken  thereat 
resulted  in  the  election,  by  the  plurality  set  opposite  their  re- 
spective names,  of  the  following  directors  to  serve  for  the  en- 
suing year. 
Names  Votes  Received 

John  Johnson   125 

George  Williams   108 

Charles  Wilson   117 

Witness  our  hands  this day  of ,  19 

William    Spruce. 
John  Jacobs. 

State  op  New  York,  County  of  New  York,  ss: 

Before  me,  a  notary  public,  on  this   ....    day  of    , 

19 .... ,  personally  appeared  William  Spruce  and  John  Jacobs, 
to  me  well  known  to  be  persons  described  in  and  who  executed 
the  foregoing  certificate,  and  severally  acknowledged  that  they 
executed  the  same  for  the  uses  and  purposes  therein  set  forth. 

Martin  Marks, 
(Notarial  Seal.)  Notary  Public  for  County  of  New  York. 


FORM   42 
NOTICE  OF  ELECTION  AS  DIRECTOR 

Fit-Well  Clothing  Corporation, 

T^        „.  New  York  City. 

Dear  Sir: 

You  are  hereby  notified  that  at  the  annual  meeting  of  the 

stockholders  of  the  Fit-Well  Clothing  Corporation  held  on , 

19. . . .,  you  were  elected  a  member  of  its  Board  of  Directors. 


SECURITIES-ISSUING    ORGANIZATIONS     531 

The  next  regular  meeting  of  the  Board  will  be  held  in  the  office 

of  the  Company    ,    ,  at    o'clock    ,  for 

the  election  of  officers  and  for  the  transaction  of  such  other 
business  as  may  come  before  the  meeting. 

You  are  requested  to  be  present  and  take  part  in  that  meeting. 

Respectfully, 


Secretary. 


FORM   43 

OATH  OF  OFFICERS 

State  of ,  County  of ,  ss : 

I,  ,  being  first  duly  sworn,  on  oath  declare  that  I 

am  a  bona  fide  stockholder  of  the  Union  Cereal  Company,  and 
that  at  a  regular  {or  special)  meeting  of  the  board  of  directors 
of  said  corporation,  called  and  held  in  accordance  with  the  laws 

of  the  state  of and  the  articles  of  incorporation  and 

by-laws  of  the  said  corporation  on  the day  of , 

19....,  I  was  duly  and  regularly  elected  to  the  office  of  presi- 
dent (or  other  office)  and  that  I  accept  the  trust  imposed  in  me 
by  said  election;  and  I  promise  and  swear  that  during  all  the 
time  of  holding  said  office  I  will  support  and  obey  the  Constitu- 
tion and  laws  of  the  United  States,  the  constitution  and  laws  of 

the  state  of ,  and  the  articles  of  incorporation  and 

by-laws  of  said  corporation,  and  will  at  all  times  faithfully,  im- 
partially and  diligently  perform  and  carry  out  the  duties  of  said 
office  to  the  best  of  my  ability. 

(Signed)  

Subscribed   and   sworn   to   before   me   this    day   of 

19 


Notary  Pubhc  in  and  for  the  state  of ,  etc. 


532  SUPPLEMENTARY    FORMS 

FORM   44 
TREASURER'S  BOND 

Know  All  Men  By  These  Presents: 

That  "We,  Max  Engels  of  New  York  City,  as  principal,  and 
William  H.  Flint,  of  New  York  City,  and  John  H.  Strong  of 
Brooklyn,  New  York,  as  sureties,  are  held  firmly  bound  unto  the 
Fit-Well  Clothing  Corporation,  duly  organized  under  the  laws  of 
the  State  of  New  York,  in  sum  of  Five  Thousand  Dollars  ($5,000), 
to  the  payment  of  which  to  the  said  corporation,  its  successors, 
or  assigns,  we  do  by  these  presents  jointly  and  severally  bind 
ourselves,  our  heirs,  executors,  and  administrators, 
ministrators. 

Signed  and  sealed  this  23rd  day  of  June,  1921. 

The  condition  of  the  above  obligation  is  that: 
Whereas,  the  said  Max  Engels  has  been  elected  Treasurer  of  the 
said  Fit-Well  Clothing  Corporation  for  the  period  of  one  year 
from  the  23rd  day  of  June,   1921,  and  may  hereafter  be  re- 
elected to  continue  in  such  office  for  a  further  period : 

Now,  Therefore,  If  the  said  Max  Engels  shall  hereafter  in  all 
respects  fully,  faithfully,  and  honestly  perform  and  discharge  the 
duties  of  said  office  so  long  as  he  shall  continue  therein,  both 
during  the  term  for  which  he  has  been  elected  and  during  such 
further  time  as  he  may  continue  therein,  whether  by  re-election 
or  otherwise,  and  shall  when  properly  so  required,  fully  and 
faithfully  account  to  the  said  Corporation,  its  successors,  or 
assigns,  for  all  moneys,  goods,  and  properties  whatsoever,  for  or 
with  which  the  said  Max  Engels  may  in  any  wise  be  accountable 
or  beholden  to  the  said  Corporation,  and  if  at  the  expiration  of 
his  term  of  or  continuance  in  office,  or  prior  thereto  in  the  event 
of  his  death,  resignation  or  removal  from  office,  all  books,  papers, 
vouchers,  money,  and  other  property  of  whatsoever  kind  placed 
in  his  custody  as  Treastirer  of  said  Corporation,  shall  be  forth- 
with restored  to  the  said  Corporation,  its  successors,  or  assigns, 
then  this  obligation  shall  be  void,  but  otherwise  to  remain  in  full 
force  and  effect. 

Signed,  sealed  and  delivered         Max  Enoels   (L.  S.) 
in  the  presence  of  William  H.  Flint  (L.  S.) 

John  A.  Smith,  John  H.  Strong  (L.  S.) 

Henry  Z.  Jones. 


SECURITIES-ISSUING    ORGANIZATIONS     533 

Dividends  and  Financial  Matters.  —  Dividends  are  de- 
clared by  resolution  of  the  board  of  directors  out  of  the 
net  earnings  of  the  corporation.  Such  a  resolution  may 
simply  set  aside  and  appropriate  a  stated  sum  to  be  used 
to  pay  a  stipulated  dividend  on  all  classes  of  stock  out- 
standing, or  it  may  declare  a  dividend  of  a  specified  per  cent 
to  be  paid  out  of  the  net  earnings  on  each  class  of  stock, 
respectively.  In  any  case  it  should  direct  the  treasurer  to 
give  notice  of  the  dividend  and  to  pay  it  when  it  is  due  to 
stockholders  of  record  as  of  a  specified  day. 


FORM  45 
DIRECTORS'    RESOLUTION    DECLARING    DIVIDEND 

Resolved,  That  the  sum  of  Five  Thousand  Dollars  (S5,000)  be 
and  hereby  is  appropriated  and  set  aside  from  the  surplus  profits 
of  this  company  for  the  payment  of  the  regular  One  and  Three 
Quarters  Per  Cent  (1%%)  quarterly  di\'idend  upon  its  out- 
standing stock,  said  dividend  to  be  due  and  payable  on  the  1st 
day  of  April,  1921,  to  the  stockholders  of  record  as  shown  by  the 
books  of  the  Company  at  the  close  of  business  on  the  15th  day 
of  March. 

Resolved  Further,  That  the  Treasurer  of  this  Company  be 
hereby  authorized  and  instructed  to  give  due  notice  of  such 
dividend  and  to  pay  the  same  when  due. 


FORM   46 

RESOLUTION  DECLARING  DIVIDEND  ON  PREFERRED 
STOCK  ONLY 

Resolved,  That  the  semi-annual  dividend  of  Three  Per  Cent 
(3%)  upon  the  outstanding  Preferred  Stock  of  the  Company  be 
and  hereby  is  declared  from  the  surplus  profits,  said  dividend  to 
be  paid  on  the  first  day  of  December,  1920,  at  the  Liberty  Na- 
tional Bank,  120  Broadway,  New  York  City,  to  holders  of  record 


534  SUPPLEMENTARY    FORMS 

at  the  close  of  business,  Thursday,  November  11,  1920,  and 
that  the  Treasurer  of  this  Company  be  hereby  instructed  and 
fully  authorized  to  give  the  same  on  the  date  set  forth. 

If  the  stock  has  no  par  value  the  resolution  states  the 
amount  of  the  dividend  to  be  paid  on  each  share  in  dollars 
and  cents  as  follows: 

Resolved,  that  a  regular  quarterly  dividend  of  One  Dollar  and 
Fifty  Cents  ($1.50)  on  each  share  of  Common  Stock  outstanding 
be  and  hereby  is  declared,  payable,  etc 


FORM   47 
TREASURER'S  NOTICE  OF  DIVIDEND 

American  HmE  &  Leather  Co. 
New  York,  October  26,  1920. 
A  dividend  of  1%%  has  this  day  been  declared  upon  the  pre- 
ferred capital  stock  of  the  company,  payable  out  of  the  accumu- 
lated net  profits  arising  from  the  business  of  the  Corporation, 
payable  on  January  3,  1921,  to  stockholders  of  record  at  the 
close  of  business  December  11,  1920. 

Geo.  a.  Hill,  Treasurer. 

FORM  48 
NOTICE  OF  DIVIDEND  IN  FORM  OF  PROPERTY 

Hocking  Valley  Products  Company. 
Dividend  No.  1. 

The  Board  of  Directors  of  the  Hocking  Valley  Products 
Compiiny  at  a  meeting  held  on  October  21st,  1920,  have  declared 
out  of  the  net  earnings  and  profits  of  the  company  for 
and  during  the  year  1920  a  dividend  of  5%  upon  the  capital 
stock  of  the  Company  as  now  authorized  and  constituted,  such 
dividend  to  be  payable,  however,  only  in  United  States  of  America 
Fourth  Liberty  4i/4%  Bonds  with  coupon  due  April  15th,  1921, 
and  subsequent  coupons  attached. 

The  said  dividend  shall  be  payable  on  November  18th,  1920, 


SECURITIES-ISSUING    ORGANIZATIONS     535 

to  the  stockholders  of  record  at  the  close  of  business  on  November 
Sth,  1920. 

Where  the  amount  of  any  dividend  payment,  or  any  part 
thereof,  is  not  Fifty  Dollars  ($50.),  or  a  multiple  thereof,  pay- 
ment shall  be  made  in  cash  on  the  basis  of  90%  as  the  current 
market  price  of  such  goods  instead  of  in  said  bonds. 

The  books  of  the  Company  will  be  closed  on  November  8,  1920, 
and  remain  closed  until  the  opening  of  business  on  November 
19th,  1920. 

Such  dividend  is  payable  only  upon  and  in  respect  to  the 
present  authorized  capital  stock  of  the  company  of  the  par 
value  of  $10  each  per  share,  and  stockholders  having  voting 
Trust  Certificates,  or  former  stock  of  the  Company  of  $100  per 
share  par  value,  or  $20  per  share  par  value,  are  requested  to 
take  proper  steps  for  exchange  of  such  certificates  or  stock  into 
the  present  authorized  and  existing  capital  stock  of  the  Company. 

S.  L.  ChamberlaiNj  President. 


FORM  49 
FINANCIAL  STATEMENT  OF  A  CORPORATION 

PfiTTIBONB    MULLIKEN    Co. 

General  Balance  Sheet,  December  31,  1918. 

Assets 

Real  estate,  factory,  etc $1,499,989 

Patents  &  good-will 6,201,448 

Deferred  charges 

Current  assets- — 

Cash  $811,339 

Treasury  securities 350,957 

Notes  Receivable 35,500 

Accounts  receivable 553,572 

Inventories    710,684 

U.  S.  Liberty  Loan  Bonds 100,750 

Total  current  assets 2,562,802 

Total  assets  $10,264,239 


536  SUPPLEMENTARY    FORMS 

Liabilities 

First  pfd.  stock $1,000,000 

Second  pfd.  stock 750,000 

Common  stock 7,000,000 

Special  surplus 

Profit  and  loss  surplus 1,166,382 

Current  liabilities  — 

Accounts  payable $  97,857 

Reserve  for  taxes,  etc 250,000 

Total  current  liabilities $347,857 

Total  liabilities  $10,264,239 

Corporate  Signatures.  —  In  general  business  transactions 
the  corporation  may  be  bound  by  the  signature  of  its  duly 
appointed  agents  in  all  matters  delegated  to  them.  In  the 
more  important  transactions  the  "  official  signature  "  of  the 
corporation  is  necessary,  and  in  all  legal  and  formal  docu- 
ments and  contracts  the  "  corporate  signature  "  should  be 
used  with  the  seal. 


FORM  50 
OFFICIAL  SIGNATURE 


Julius  Goldstein, 
President. 


or  more  formally 


Julius  Goldstein, 
President,  Fit-Well   Clothing 
Corporation. 


SECURITIES-ISSUING    ORGANIZATIONS     537 

FORM   51 
CORPORATE  SIGNATURE  — INFORMAL 

Fit- Well  Clothing  Corporation, 
By  Julius  Goldstein, 
President, 

(In  the  above  a  rubber  stamp  is  sometimes  used  and  the  signa- 
ture of  the  president  filled  in  in  writing) . 

FORM   52 
CORPORATE  SIGNATURE  —  FORMAL 

Pettibone  Mulliken  Company, 
By  A.  H.  Mulliken,  President 
(Corporate)  H.  R.  Prest,  Secretary. 

(Seal) 

The  signatures  to  formal  instruments  are  usually  pre- 
ceded by  a  "  testimonium  clause  "  as  follows: 

In  Wit7iess  Whereof,  the  said  Pettibone  Mulliken  Company  has 
caused  its  corporate  name  to  be  hereunto  subscribed  by  its  Presi- 
dent and  its  duly  attested  corporate  seal  to  be  hereunto  affixed 
by  its  Secretary,  all  in  the  City  of  Cliicago,  State  of  Illinois,  on 
the  22nd  day  of  August,  1918. 

(Corporate)  Pettibone  Mulliken  Company, 

(Seal)  By  A.  H.  Mulliken, 

Attest  Seal:  President. 

H.  R.  Prest, 
Secretary. 

Sale  of  Assets  and  Dissolution.  —  A  sale  of  the  entire 
assets  of  the  corporation  must  ordinarily  be  authorized  by  a 
two-thirds  or  a  three-quarters  majority  of  all  of  the  stock- 
holders. Upon  such  authorization  the  board  of  directors 
will  draft  and  make  a  resolution  to  carry  out  the  wishes 
of  the  stockholders. 


538  SUPPLEMENTARY    FORMS 


FORM   53 

STOCKHOLDERS'  RESOLUTION  FOR  SALE  OF  ENTIRE 

ASSETS 

Whereas,  A.  M.  Lord  as  Trustee  before  the  organization  of  the 
Consohdated  Clothing  Company,  has  made  a  proposition  to 
purchase  the  entire  plant  and  business  of  this  company  as  a 
going  concern,  including  all  assets  and  liabilities,  save  cash  in 
bank  and  on  hand,  for  Five  Thousand  Dollars  ($5,000)  in  cash 
and  Fifty  Thousand  Dollars  ($50,000)  par  value  of  the  Con- 
solidated Clothing  Company. 

Now,  Therefore,  Be  It  Resolved,  That  the  said  proposition  be 
hereby  approved,  and  that  the  Directors  of  this  Company  be  and 
hereby  are  fully  authorized,  instructed,  and  empowered  to  accept 
the  said  proposition  for  sale  of  its  entire  property  and  business, 
and  to  do  all  things  necessary  to  carry  such  acceptance  into  effect 
according  to  the  terms  of  said  proposition. 


FORM   54 
DIRECTORS'  RESOLUTION  FOR  SALE  OF  ENTIRE  ASSETS 

Whereas,  A  proposition  has  been  made  by  the  Trustee  of  the 
Consolidated  Clothing  Company  to  purchase  the  entire  property 
and  business  of  this  Company  for  Five  Thousand  Dollars  ($5,000) 
in  cash  and  Fifty  Thousand  Dollars  ($50,000)  in  stock  of  the 
said  proposed  corporation  as  set  forth  in  his  written  proposition 
heretofore  ordered  to  be  spread  upon  the  minutes  of  this  meet- 
ing; and 

Whereas,  The  Stockholders  of  this  company  in  duly  assembled 
meeting  at  which  all  the  voting  stock  of  the  Company  was  repre- 
sented in  person  or  by  proxy,  did  by  resolution  unanimously 
carried,  approve  said  sale  and  authorize  and  instruct  this  Board 
to  accept  said  proposition: 

Now,  Therefore,  Be  It  Resolved,  That  the  said  proposition  be 
and  the  same  is  hereby  accepted  by  this  Company  on  the  terms 
set  forth  in  said  written  proposition  as  entered  upon  the  minutes 
of  this  meeting,  and  the  President  and  Secretary  of  the  Company 


SECURITIES-ISSUING    ORGANIZATIONS     539 

are  hereby  empowered  and  instructed  to  execute  all  proper  instru- 
ments to  carry  such  acceptance  into  effect,  and  on  behalf  of  this 
Company  to  receive  the  said  Five  Thousand  Dollars  (S5,000)  in 
cash  and  Fifty  Thousand  Dollars  ($50,000)  in  stock  of  the  said 
Consolidated  Clothing  Company,  and  to  do  all  such  other  things 
in  connection  with  such  sale  and  the  said  transfer  of  property  as 
may  be  found  necessary  for  its  proper  consummation. 

A  private  business  corporation  may  be  dissolved  in  any 
one  of  the  following  ways:  (1)  expiration  of  the  charter, 
(2)  repeal  of  the  charter  by  the  legislature,  (3)  by  volun- 
tary action  of  the  corporation,  (4)  by  forfeiture  for  viola- 
tion of  the  law,  and  (5)  through  the  death  of  all  of  its 
stockholders  in  the  absence  of  heirs. 

The  procedure  to  be  followed  in  case  of  voluntary  dis- 
solution is  clearly  defined  in  the  corporation  statutes  of 
each  state.  It  must  be  authorized  by  resolution  of  the 
Stockholders  and  carried  out  by  the  directors  in  a  manner 
similar  to  that  set  forth  for  the  sale  of  the  entire  assets. 
This  procedure  varies  considerably,  but  in  all  cases  official 
notice  must  be  given  by  a  proper  state  authority. 


FORM   55 
NOTICE  OF  DISSOLUTION 

State  of  New  York_,  Office  of  the  Secretary  of  State  ss: 

This  certificate  issued  in  duplicate,  hereby  certifies  that  the 
Haster  Columbus  Company,  Inc.,  a  domestic  stock  corporation, 
has  filed  in  this  office  on  this  26th  day  of  February,  1921,  papers 
for  the  voluntary  dissolution  of  said  corporation  under  section 
221  of  the  General  Corporation  Law,  and  that  it  appears  there- 
from that  such  corporation  has  complied  with  said  section  in 
order  to  be  dissolved. 

WITNESS  my  hand  and  the  seal  of  office  of  the  Secretary  of 
State,  at  the  City  of  Albany,  this  twenty-sixth  day  of  February, 
one  thousand  nine  hundred  and  twenty-one. 

(Seal)  A.  B.  Parker,  Deputy  Secretary  oj  State. 


540  SUPPLEMENTARY    FORMS 

3.    THE    BUSINESS   TRUST 

FORM   56 

AGREEMENT  AND  DECLARATION  OF  TRUST  OF  THE 
MASSACHUSETTS  GAS  COMPANIES 

THIS  AGREEMENT,  made  this  twenty-fifth  day  of  Septem- 
ber, A.D.  nineteen  hundred  and  two,  by  and  between  Charles 
Francis  Adams,  2nd,  Walter  Cabot  Baylies,  Samuel  Carr, 
Robert  Clarence  Pruyn,  Joseph  Ballister  Russell,  Frederic  Elmer 
Snow,  Charles  Augustus  Stone,  Albert  Strauss,  Christopher  Minot 
Weld,  and  Robert  Winsor,  together  with  their  successors  (herein 
designated  as  the  "  Trustees  ") ,  and  Francis  H.  Peabody,  Frank 
G.  Webster,  Frank  E.  Peabody,  and  Robert  Winsor,  co-partners, 
carrying  on  business  in  the  city  of  Boston  under  the  name  of 
Kidder,  Peabody  &  Company,  and  James  Seligman,  Isaac  N. 
Seligman,  Henry  Seligman,  Jefferson  Seligman,  Emil  Carlebach, 
Albert  Strauss,  and  Frederick  Strauss,  co-partners  carrying  on 
business  in  the  city  of  New  York  under  the  name  of  J.  &  W. 
Seligman  &  Company,  together  with  their  assigns  (herein  desig- 
nated as  the  "Subscribers  "),  witnesseth: 

WHEREAS  it  is  proposed  that  the  Trustees  shall  acquire 
from  the  subscribers,  upon  such  terms  and  conditions  as  may 
be  agreed  upon,  certain  property  and  cash,  and  shall  employ 
and  manage  the  same  and  all  other  property  which  they  may 
hereafter  acquire  as  such  Trustees,  in  the  manner  hereinafter 
stated;  and  it  is  likewise  proposed  that  the  beneficial  interest  in 
the  property,  from  time  to  time  held  by  the  Trustees,  and  in 
the  business  conducted  by  them,  shall  be  divided  into  shares  to 
be  evidenced  by  certificates  therefor,  as  hereinafter  provided: 

NOW,  THEREFORE,  the  Trustees  hereby  declare  that  they 
will  hold  said  property  and  cash  so  to  be  acquired  by  them,  as 
well  as  all  other  property  which  they  may  acquire  as  such  Trus- 
tees, together  with  the  proceeds  thereof,  in  trust,  to  manage 
and  dispose  of  the  same  for  the  benefit  of  the  holders,  from  time 
to  time  of  the  certificates  of  shares  issued  and  to  be  issued  here- 
under, according  to  the  priorities  expressed  in  said  certificates, 
and  in  the  manner  and  subject  to  the  stipulations  herein  con- 
tained, to-wit: 


SECURITIES-ISSUING    ORGANIZATIONS     541 

FIRST.  The  Trustees,  in  their  collective  capacity,  shall  be 
designated,  so  far  as  practicable,  as  the  "  Massachusetts  Gas 
Companies  "  and  under  that  name  shall,  so  far  as  practicable, 
conduct  all  business  and  execute  all  instruments  in  writing,  in  the 
performance  of  their  trust. 

SECOND.  The  Trustees  shall  be  ten  in  number;  and,  of  the 
Trustees  herein  mentioned  by  name,  Charles  Francis  Adams,  2nd, 
Walter  Cabot  Bayhes,  Samuel  Carr,  Robert  Clarence  Pruyn,  and 
Joseph  Ballister  Russell  shall  hold  office  until  the  first  annual 
meeting  of  the  shareholders,  and  Frederic  Elmer  Snow,  Charles 
Augustus  Stone,  Albert  Strauss,  Christopher  Minot  Weld  and 
Robert  Winsor  shall  hold  office  until  the  second  annual  meeting 
of  the  shareholders,  except  that  said  Trustees,  as  well  as  any 
Trustees  hereafter  elected,  shall  in  all  cases  hold  office  until  their 
successors  have  been  elected,  and  accepted  this  trust. 

The  shareholders  shall,  at  each  annual  meeting,  or  adjournment 
thereof,  elect  five  Trustees  to  serve  for  the  term  of  two  years 
next  ensuing.  In  the  case  of  the  death,  resignation,  or  inability  to 
act  of  any  of  said  Trustees,  the  remaining  Trustees  shall  fill  any 
vacancies  for  the  unexpired  term.  As  soon  as  any  trustees  elected 
by  the  shareholders  or  by  the  remaining  Trustees  to  fill  a  vacancy 
have  accepted  this  trust,  the  trust  estate  shall  vest  in  the  new 
Trustees  or  Trustee,  together  with  the  continuing  Trustees,  with- 
out any  further  act  or  conveyance. 

Upon  the  election  of  any  Trustee  either  by  the  remaining 
Trustees  to  fill  a  vacancy,  or  by  the  shareholders,  he  shall  forth- 
with execute  a  written  acceptance  of  this  trust,  which,  together 
with  a  certificate  of  the  Secretary  of  the  election  of  such  trustee 
shall  be  forthwith  filed  with  the  Trust  Company  at  that  time 
having  the  custody  of  the  duplicate  of  the  original  of  this 
instrument. 

THIRD.    The  Trustees  are  authorized  to  engage  — 

(a)  In  the  business  of  manufacturing,  buying,  selhng  and  deal- 
ing in  coal,  oil,  coke,  gas  and  all  products  thereof; 

(b)  In  the  business  of  manufacturing  and  supplying  gas  or 
electricity  or  any  other  agent  for  light,  heat,  power,  or  other 
purposes; 

(c)  In  the  business  of  acquiring,  owning,  managing,  exchanging, 
selling,  and  dealing  in  the  stocks,  shares  and  securities  of  cor- 


542  SUPPLEMENTARY    FORMS 

porations,  trusts  or  associations  engaged,  in  whole  or  m  part,  in 
any  business  above  mentioned,  or  in  owning  or  operating  railways 
or  railroads  or  transporting  passengers,  merchandise,  mails  or  ex- 
press matter,  or  in  manufacturing,  selling  or  repairing  machines, 
equipments,  supplies,  or  other  articles  used  by  corporations,  trusts 
or  associations  of  any  of  the  classes  above  mentioned,  and  or  in 
the  business  of  acquiring,  owning,  managing,  exchanging,  selling, 
or  dealing  in  the  stocks,  shares  or  securities  of  any  corporation, 
trust  or  association  which  owns,  or  whose  stock  or  securities  are 
based  upon  or  secured  by  the  stocks  or  securities  of  any  cor- 
poration, trust  or  association  of  the  character  above  mentioned; 

(d)  In  any  business  similar  in  character  to  that  above  men- 
tioned which  the  trustees  may  deem  expecUent,  and  to  acquire, 
hold,  and  dispose  of  the  stocks,  shares  or  securities  of  corpora- 
tions, trusts  or  associations  doing  business  of  a  character  similar 
to  any  business  above  described. 

The  Trustees  shall  hold  the  legal  title  to  all  property  at  any 
time  belonging  to  this  trust,  and,  subject  only  to  the  specific  limi- 
tations herein  contained,  they  shall  have  the  absolute  control, 
management,  and  disposition  thereof,  and  shall  likewise  have  the 
absolute  control  of  the  conduct  of  all  business  of  the  trust;  and 
the  following  enumeration  of  specific  duties  and  powers  shall  not 
be  construed  in  any  way  as  a  limitation  upon  the  general  powers 
intended  to  be  conferred  upon  them. 

The  Trustees  shall  have  authority  to  adopt  and  use  a  common 
seal;  to  make  all  such  contracts  as  they  may  deem  expedient  in 
the  conduct  of  the  business  of  the  trust;  from  time  to  time  to 
release,  sell,  exchange,  or  otherwise  dispose  of,  at  public  or  private 
sale,  any  or  all  of  the  trust  property,  whether  real  or  personal, 
for  such  prices  either  in  cash  or  the  stock,  shares,  or  securities 
of  other  corporations;  trusts  or  associations  and  upon  such  terms 
as  to  credit  or  otherwise  as  they  may  deem  expedient,  to  guaran- 
tee or  assume  the  obligations  of  other  corporations,  trusts  or  as- 
sociations and  to  enter  into  such  agreements  by  way  of  indemnity 
or  otherwise  as  they  may  deem  expedient  in  connection  with  the 
acquisition  of  property  from  the  subscribers  as  hereinbefore  pro- 
vided or  otherwise;  to  confer,  by  way  of  substitution,  such  power 
and  authority  on  the  President,  Treasurer,  Secretary,  and  Execu- 
tive Committee,  and  other  officers  and  agents  appointed  by  them, 


SECURITIES-ISSUING    ORGANIZATIONS     543 

as  they  may  deem  expedient;  to  borrow  money  for  the  purpose 
of  the  trust  and  give  the  obhgations  to  the  Trustees  therefor; 
to  loan  any  money  from  time  to  time  in  the  hands  of  the 
Trustees,  with  or  without  security,  on  such  terms  as  they  may 
deem  expedient;  to  subscribe  for,  acquire,  own,  sell,  or  otherwise 
dispose  of  such  real  or  personal  property,  including  the  stocks, 
shares,  and  securities  of  any  other  corporations,  trusts  or  associa- 
tions, as  they  may  deem  expedient  in  connection  with  the  purposes 
of  the  trust;  to  vote  in  person  or  by  proxy  on  all  shares  of  stock 
at  any  time  held  by  them,  and  to  collect  and  receive  the  income, 
interest,  and  profits  of  any  such  stock  or  securities;  to  collect, 
sue  for,  receive,  and  receipt  for  all  sums  of  money  at  any  time  be- 
coming due  to  said  trust;  to  employ  counsel  and  to  begin,  prose- 
cute, defend,  and  settle  suits  at  law,  in  equity  or  otherwise,  and  to 
compromise  or  refer  to  arbitration  any  claims  in  favor  of  or 
against  the  trust;  and  in  general  to  do  all  such  matters  and  things 
as  in  their  judgment  will  promote  or  advance  the  business  which 
they  are  authorized  to  carry  on,  although  such  matters  and  things 
may  be  neither  specifically  authorized  nor  incidental  to  any  mat- 
ters or  things  specifically  authorized.  In  addition  to  the  powers 
herein  granted  the  Trustees  shall  have  all  powers  with  reference 
to  the  conduct  of  the  business  and  management  of  the  property 
of  the  trust  which  are  possessed  by  directors  of  a  manufacturing 
corporation  under  the  laws  of  the  Commonwealth  of  Massa- 
chusetts. 

So  far  as  strangers  to  the  trust  are  concerned,  a  resolution  of 
the  Trustees  authorizing  a  particular  act  to  be  done  shall  be 
conclusive  evidence  in  favor  of  strangers  that  such  act  is  within 
the  power  of  the  Trustees;  and  no  purchaser  from  the  Trustees 
shall  be  bound  to  see  to  the  application  of  the  purchase  money 
or  other  consideration  paid  or  delivered  by  or  for  said  purchaser 
to  or  for  the  Trustees. 

FOURTH.  Stated  meetings  of  the  Trustees  shall  be  held  at 
least  once  a  month,  and  other  meetings  shall  be  held  from  time 
to  time  upon  the  call  of  the  President  or  any  three  of  the 
Trustees.  A  majority  of  the  Trustees  shall  not  be  necessary  to 
the  validity  of  any  action  taken  by  them,  but  the  decision  ex- 
pressed by  vote  of  a  majority  of  the  Trustees  present  and  voting 
at  any  meeting  shall  be  conclusive. 


544  SUPPLEMENTARY    FORMS 

The  Trustees  may  make,  adopt,  amend,  or  repeal  such  by-laws, 
rules,  and  regulations  not  inconsistent  with  the  terms  of  this 
instrument  as  they  may  deem  necessary  or  desirable  for  the 
conduct  of  their  business  and  for  the  government  of  themselves, 
their  agents,  servants  and   representatives. 

FIFTH.  The  Trustees  shall  annually  elect  from  among  their 
number  a  President,  and  shall  also  elect  from  among  their  num- 
ber or  otherwise,  a  Treasurer,  a  Secretary,  and,  in  their  dis- 
cretion, one  or  more  Vice-Presidents,  and  one  or  more  Assistant 
Treasurers  or  Secretaries,  and  they  shall  have  authority  to  ap- 
point such  other  officers,  agents,  and  attorneys  as  they  may 
deem  necessary  or  expedient  in  the  conduct  of  their  business. 
They  shall  also  have  authority  to  accept  resignations  and  to  fill 
any  vacancies  in  the  officers  appointed  by  them,  for  the  unexpired 
term,  and  shall  likewise  have  authority  to  elect  temporary  offi- 
cers to  serve  during  the  absence  or  disability  of  regular  officers. 
They  may  also  by  a  majority  vote  of  all  the  Trustees,  remove  any 
officer  or  agent  elected  or  appointed  by  them. 

The  President,  Treasurer,  and  Secretary  shall  have  the  author- 
ity and  perform  the  duties  usually  incident  to  those  offices  in  the 
case  of  corporations,  so  far  as  appUcable  thereto,  and  shall  have 
such  other  authority  and  perform  such  other  duties  as  may  from 
time  to  time  be  determined  by  the  Trustees.  The  Trustees  shall 
fix  the  compensation,  if  any,  of  all  officers  and  agents  whom  they 
may  elect  or  appoint,  and  may  also  pay  to  themselves  such  com- 
pensation for  their  own  services  as  they  may  deem  reasonable. 

The  Trustees  may  also  appoint  from  among  their  number  an 
Executive  Committee  of  three  or  five  persons,  to  whom  they  may 
delegate  such  of  the  powers  herein  conferred  upon  the  Trustees 
as  they  may  deem  expedient. 

The  Trustees  shall  cause  to  be  kept  by  the  Secretary  elected 
by  them  a  record  of  all  meetings  of  the  shareholders.  Trustees 
and  E.xecutive  Committee,  which  record  shall  be  of  the  same  char- 
acter and  effect  as  that  kept  in  the  case  of  corporations,  and  so 
far  as  strangers  to  the  trust  are  concerned,  shall  be  conclusive 
against  the  Trustees  of  the  facts  and  doings  therein  stated. 

The  Trustees  shall  not  be  liable  for  any  error  of  judgment, 
or  for  any  loss  arising  out  of  any  act  or  omission  in  the  execution 
of  this  trust,  so  long  as  they  act  in  good  faith,  nor  shall  they  be 


SECURITIES-ISSUING    ORGANIZATIONS     545 

personally  liable  for  the  acts  or  omissions  of  each  other,  cr  for 
the  acts  or  omissions  of  any  officer,  agent,  or  servant  elected  or 
appointed  by  or  acting  for  them;  and  they  shall  not  be  obliged 
to  give  any  bond  to  secure  the  due  performance  of  this  trust 
by  them. 

Any  Trustee  may  acquire,  own,  and  dispose  of  shares  in  this 
trust  to  the  same  extent  as  if  he  were  not  a  Trustee. 

SIXTH.  The  beneficial  interest  in  this  trust  shall,  in  the  first 
instance,  be  divided  into  three  hundred  thousand  (300,000) 
shares  of  the  par  value  of  one  hundred  (100)  dollars  each,  of 
which  one  hundred  and  fifty  thousand  (150,000)  shares  shall  be 
preferred  and  one  hundred  and  fifty  thousand  (160,000)  common. 

The  preferred  shares  shall  entitle  the  holder  to  receive  out  of 
the  net  profits  of  the  trust,  a  semi-annual,  preferential,  cumula- 
tive dividend  at  the  rate  of  four  per  centum  per  annum,  and  no 
more,  commencing  to  accrue  on  the  first  day  of  December,  1902, 
payable  on  the  first  days  of  June  and  December  in  each  year, 
and  to  be  paid  or  provided  for  before  any  dividend  shall  be  set 
apart  or  paid  on  the  common  shares,  provided  that  after  the 
payment  or  setting  aside  of  a  semi-annual  dividend  on  the  pre- 
ferred shares  at  the  rate  of  four  per  centum  per  annum,  all  pre- 
viously accrued  dividends  thereon  having  been  paid  or  set  aside, 
the  Trustees  may  forthwith,  without  waiting  for  the  expiration 
of  the  year,  pay  or  set  aside  a  semi-annual  dividend  on  the 
common  shares;  and,  in  case  of  liquidation,  the  proceeds  of 
liquidation  shall  be  first  applied  to  the  payment  to  the  holders 
of  preferred  shares  of  the  sum  of  one  hundred  dollars  per  share 
and  accrued  and  unpaid  dividends  thereon,  and  the  balance  re- 
maining thereafter  shall  be  divided  among  the  holders  of  common 
shares  in  proportion  to  their  holdings. 

As  evidence  of  the  ownership  of  said  shares  the  Trustees  shall 
cause  to  be  issued  to  each  shareholder  a  negotiable  certificate,  or 
certificates,  to  be  signed  by  such  transfer  agent  or  transfer  agents 
and  registrar  or  registrars  as  the  Trustees  may  determine,  and  by 
the  President  or  any  Vice-President,  and  attested  by  any  Secretary 
or  Assistant  Secretary,  which  certificates  shall  be  in  the  form 
following,  to-wit: 


546  SUPPLEMENTARY    FORMS 

Massachusetts  Gas  Companies 

No.  Preferred  Shares. 

Not  subject  to  assessment. 

This  certifies  that 

is  the  holder  of Preferred  Shares  in  the 

Massachusetts   Gas   Companies,  which   he   holds   subject   to  an 
Agreement  and  Declaration  of  Trust  dated  September  25th,  1902, 

a  duplicate  original  of  which  is  on  file  with  the 

Trust  Company,  and  which  is  hereby  referred  to  and  made  a 
part  of  this  certificate. 

The  shares  in  the  Massachusetts  Gas  Companies  are  of  the 
par  value  of  one  hundred  dollars  each,  and  are  divided  into 
preferred  and  common  shares. 

It  is  mutually  agreed  between  the  holder  hereof  and  the 
Massachusetts  Gas  Companies  and  its  shareholders  as  follows: 
that  the  preferred  shares  are  entitled  out  of  the  net  profits  of  the 
Companies  to  a  semi-annual,  preferential,  cumulative  dividend 
at  the  rate  of  four  per  centum  per  annum,  and  no  more,  com- 
mencing to  accrue  on  the  1st  day  of  December,  1902,  payable  on 
the  first  days  of  June  and  December  in  each  year,  and  to  be  paid 
or  provided  for  before  any  dividend  shall  be  set  apart  or  paid 
on  the  common  shares,  provided  that  after  the  payment  or 
setting  aside  of  a  semi-annual  dividend  on  the  preferred  shares 
at  the  rate  of  four  per  cent  per  annum,  all  previously  accrued 
dividends  thereon  having  been  paid  or  set  aside,  the  Massachusetts 
Gas  Companies  may  forthwith,  without  waiting  for  the  expira- 
tion of  the  year,  pay  or  set  aside  a  semi-annual  dividend  on  the 
common  shares;  that  in  the  event  of  liquidation  the  proceeds  of 
liquidation  shall  be  first  applied  to  the  payment,  to  holders  of 
the  preferred  shares,  of  the  sum  of  one  hundred  dollars  per  share 
and  accrued  and  unpaid  dividends  thereon,  and  the  balance  re- 
maining thereafter  shall  be  divided  among  the  holders  of  common 
shares  in  proportion  to  their  holdings;  that  the  holders  of  pre- 
ferred and  common  shares  shall  have  equal  voting  powers,  and 
that  the  preferred  and  common  shares  may  be  increased  or  re- 
duced as  provided  in  the  Agreement  and  Declaration  of  Trust 
herein  referred  to. 

This  certificate  must  be  signed  by  the  Transfer  Agent  and 


SECURITIES-ISSUING    ORGANIZATIONS     547 

Registrar  of  the  shares  of  the  Massachusetts  Gas  Companies, 
who  sign  solely  to  indicate  that  the  shares  represented  by  this 
and  all  other  outstanding  certificates  bearing  their  signatures  do 
not  exceed  the  issue  of  shares  fixed  by  the  votes  of  the 
Massachusetts  Gas  Companies. 

No  transfer  hereof  will  be  of  any  effect  as  regards  the  Massa- 
chusetts Gas  Companies  until  this  certificate  has  been  surrendered 
and  the  transfer  recorded  upon  their  book. 

IN  WITNESS  WHEREOF,  the  Trustees  under  said  Declara- 
tion of  Trust  herein  designated  as  the  Massachusetts  Gas 
Companies,  have  caused  their  common  seal  to  be  hereto  affixed 
and  this  certificate  to  be  executed  in  their  name  and  behalf, 

by their   President,   and   attested   by   their 

Secretary,  this day  of 19 . . . 

Massachusetts  Gas  Companies. 

By President. 

Attest : 

By ,  Secretary. 

By ,  Transfer  Agent. 

By ,  Registrar. 

By 

For  value  received 

hereby  sell,  assign,  and  transfer 

unto 

preferred  shares  of 

the  Massachusetts  Gas  Com- 
panies, represented  by  the 
within  certificate,  and  do  hereby 
irrevocably  constitute  and  ap- 
point     

attorney,  to  trans- 
fer the  said  shares  on  the  books 
of  the  within-named  Com- 
panies, with  full  power  of  sub- 
stitution in  the  premises. 

Witness hand  this day  of 

In  presence  of 


Notice.  —  The  signature  to  this 
assignment  must  correspond  with 
the  name  as  written  upon  the  face 
of  the  certificate  in  every  particu- 
lar, without  alteration  or  enlarge- 
ment or  any  change  whatever. 


54)8  SUPPLEMENTARY    FORMS 

Massachusetts  Gas  Companies 
No.  Common  Shares, 

Not  subject   to   assessvient. 

This  certifies  that 

is  the  holder  of Common  Shares  in  the 

Massachusetts  Gas  Companies,  which  he  holds  subject  to  an 
Agreement  and  Declaration  of  Trust  dated  September  25th,  1902, 
a  duplicate  original  of  which  is  on  file  with  the  Old  Colony  Trust 
Company,  and  which  is  hereby  referred  to  and  made  a  part  of 
this  certificate. 

The  shares  in  the  Massachusetts  Gas  Companies  are  of  the 
par  value  of  one  hundred  dollars  each,  and  are  divided  into 
preferred  and  common  shares. 

It  is  mutually  agreed  between  the  holder  hereof  and  the 
Massachusetts  Gas  Companies  and  its  shareholders  as  follows: 
that  the  preferred  shares  are  entitled  out  of  the  net  profits  of 
the  Companies  to  a  semi-annual,  preferential,  cumulative  dividend 
at  the  rate  of  four  per  centum  per  annum,  and  no  more,  com- 
mencing to  accrue  on  the  last  day  of  December,  1902,  payable 
on  the  first  days  of  June  and  December  in  each  year,  and  to  be 
paid  or  provided  for  before  any  dividend  shall  be  set  apart  or 
paid  on  the  common  shares,  provided  that  after  the  payment 
or  setting  aside  of  a  semi-annual  dividend  on  the  preferred 
shares  at  the  rate  of  four  per  centum  per  annum,  all  previously 
accrued  dividends  thereon  having  been  paid  or  set  aside,  the 
Massachusetts  Gas  Companies  may  forthwith,  without  waiting 
for  the  expiration  of  the  year,  pay  or  set  aside,  a  semi-annual 
dividend  on  the  common  shares;  that  in  the  event  of  liquidation 
the  proceeds  of  liquidation  shall  be  first  applied  to  the  payment, 
to  holders  of  the  preferred  shares,  of  the  sum  of  one  hundred 
dollars  per  share  and  accrued  and  unpaid  dividends  thereon,  and 
the  balance  remaining  thereafter  shall  be  divided  among  the 
holders  of  common  shares  in  proportion  to  their  holdings;  that 
the  holders  of  preferred  and  common  shares  shall  have  equal 
voting  powers;  and  that  the  preferred  and  common  shares  may 
be  increased  or  reduced  as  provided  in  the  agreement  and  Declara- 
tion of  Trust  herein  referred  to. 


SECURITIES-ISSUING    ORGANIZATIONS     549 

This  certificate  must  be  signed  by  the  Transfer  Agent  and 
Registrar  of  the  shares  of  the  Massachusetts  Gas  Companies,  who 
sign  solely  to  indicate  that  the  shares  represented  by  this  and  all 
other  outstanding  certificates  bearing  their  signatures  do  not 
exceed  the  issue  of  shares  fixed  by  the  votes  of  the  Massachusetts 
Gas  Companies. 

No  transfer  hereof  will  be  of  any  efi'ect  as  regards  the 
Massachusetts  Gas  Companies  until  this  certificate  has  been 
surrendered  and  the  transfer  recorded  upon  their  books. 

IN  WITNESS  WHEREOF,  the  Trustees  under  said  Declara- 
tion of  Trust  herein  designated  as  the  Massachusetts  Gas 
Companies,  have  caused  their  common  seal  to  be  hereto  affixed 
and  this  certificate  to  be  executed  in  their  name  and  behalf, 

by  their  President  and  attested  by  their  Secretary,  this 

day  of  19... 

Massachusetts  Gas  Companies. 

By President. 

Attest : 

By ,  Secretary. 

By ,  Transfer  Agent. 

By ,  Registrar. 

By 

Notice.  —  The  signature  to  this   1        Fnr  vtIiip  rpr>cii'orl 

assignment  must  correspond  with  n  auit^  ikl^iv  eu 

the  name  as  writ  ten  upon  the  face         hcrebv    Sell,    assigu,    and    transfer 

01  the  certincate  in  every  particu-    I  ^  >  o    >  ^ 

lar,  without  alteration  or  enlarge-    |         UntO 

common  shares  of 

the  Massachusetts  Gas  Com- 
panies represented  by  the  within 
certificate,  and  do  hereby  irrev- 
ocably     constitute      and      appoint 

attorney 

to  transfer  the  said  shares  on 
the  books  of  the  within-named 
Companies,  with  full  power  of 
substitution  in  the  premises. 


ment  or  any  change  whatever. 


Witness hand  this day  of. 

In  presence  of 


550  SUl'PLEMENTARY    FORMS 

SEVENTH.  The  shares  hereunder  shall  be  transferable  by  an 
appropriate  instrument  in  writing  and  upon  the  surrender  of  the 
certificate  therefor,  but  no  such  transfer  shall  be  of  any  effect  as 
regards  the  Trustees  until  it  has  been  recorded  upon  the  books 
of  the  Trustees  kept  for  that  purpose. 

EIGHTH.  The  trustees  shall  issue  to  the  Subscribers,  or  their 
assigns,  certificates  for  said  original  three  hundred  thousand 
shares,  in  payment  for  and  as  evidence  of  their  ownership  of  the 
beneficial  interest  in  the  property  and  cash  proposed  to  be  trans- 
ferred to  the  Trustees  by  the  Subscribers,  as  hereinbefore  stated. 

NINTH.  For  any  of  the  purposes  of  the  Trust  the  number 
of  shares  may  from  time  to  time,  with  the  consent  of  the  holders 
of  not  less  than  two-thirds  of  such  of  the  shares  as  are  repre- 
sented and  voted  upon  at  any  meeting  called  for  that  purpose, 
but  not  otherwise,  be  increased  or  reduced.  In  case  the  number 
of  shares  is  increased,  the  additional  shares  shall  be  issued  and 
disposed  of  upon  such  terms  and  in  such  manner  as  the  share- 
holders at  such  meeting  may  determine,  and  in  case  of  such  in- 
crease such  proportion  of  the  new  shares  may  be  made  preferred 
as  the  shareholders  in  authorizing  such  increase  may  determine. 

TENTH.  In  case  of  the  loss  or  destruction  of  any  certificate 
for  shares  the  Trustees  may,  under  such  conditions  as  they  may 
deem  expedient,  issue  a  new  certificate  or  certificates  in  place  of 
the  one  lost  or  destroyed. 

ELEVENTH.  The  Trustees  may,  with  the  consent  of  the 
holders  of  at  least  two-thirds  of  each  class  of  shares  outstanding, 
given  at  a  meeting  called  for  that  purpose,  but  not  otherwise, 
mortgage  or  pledge  any  property  in  their  hands,  upon  such  terms 
and  for  such  purposes  as  the  shareholders  at  such  meeting  may 
api:)rove. 

TWELFTH.  The  Trustees  may  from  time  to  time  declare  and 
pay  dividends  out  of  the  net  earnings  from  time  to  time  received 
by  them  but  the  amount  of  such  di\idends  and  the  payment  of 
them  shall  be  wholly  in  the  discretion  of  the  Trustees,  except 
that  the  dividends  on  the  preferred  shares  shall  be  payable  semi- 


SECURITIES-ISSUING    ORGANIZATIONS     551 

annually  on  the  first  day  of  June  and  December  in  each  year, 
at  the  rate  of  four  per  centum  per  annum  and  no  more,  and  shall 
be  cumulative,  and  said  semi-annual  dividends  shall  be  paid  or 
set  apart  before  any  dividends  are  paid  on  the  common  shares. 

THIRTEENTH.  The  fiscal  year  of  the  Trustees  shall  end  on 
the  first  day  of  July  in  each  year. 

Annual  meetings  for  the  election  of  Trustees  and  for  the  trans- 
action of  other  business  shall  be  held  in  Boston,  on  the  second 
Tuesday  of  October  in  each  year,  beginning  with  the  year  1903, 
of  which  meetings  notice  shall  be  given  by  the  Secretary  by  mail- 
ing such  notice  to  each  shareholder  at  his  registered  address  at 
least  ten  days  before  said  meeting. 

Special  meetings  of  the  shareholders  may  be  called  at  any 
time  upon  seven  days'  notice,  given  as  above  stated,  when 
ordered  by  the  President  or  Trustees. 

At  all  meetings  of  the  shareholders,  each  holder  of  shares, 
whether  preferred  or  common,  shall  be  entitled  to  one  vote  for 
each  share  held  by  him;  and  any  shareholder  may  vote  by  proxy. 

No  business  shall  be  transacted  at  any  special  meeting  of  the 
shareholders  unless  notice  of  such  business  has  been  given  in 
the  call  for  the  meeting.  No  business,  except  to  adjourn,  shall 
be  transacted  at  any  meeting  of  the  shareholders  unless  the 
holders  of  a  majority  of  all  the  shares  outstanding  are  present  in 
person  or  by  proxy. 

FOURTEENTH.  Shares  hereunder  shall  be  personal  prop- 
erty, giving  only  the  rights  in  this  instrument,  and  in  the  certifi- 
cates thereof,  specifically  set  forth.  The  death  of  a  shareholder 
during  the  continuance  of  this  trust  shall  not  operate  to  de- 
termine this  trust,  nor  shall  it  entitle  the  representatives  of  the 
deceased  shareholder  to  an  accounting  or  to  take  any  action  in 
the  courts  or  elsewhere  against  the  Trustees;  but  the  executors, 
administrators,  or  assigns  of  any  deceased  shareholder  shall  suc- 
ceed to  the  rights  of  said  decedent  under  this  trust,  upon  the 
surrender  of  the  certificate  of  shares  owned  by  them. 

The  ownership  of  shares  hereunder  shall  not  entitle  the  share- 
holders to  any  title  in  or  to  the  trust  property  whatsoever,  or 
right    to    call    for    a    partition    or    division    of    the    same,    or 


552  SUPPLEMENTARY    FORMS 

for  an  accounting;  and  no  shareholder  shall  have  any  other  or 
further  rights  than  the  right  of  a  stockholder  in  a  corporation, 
so  far  as  the  same  may  be  applicable. 

FIFTEENTH.  The  Trustees  shall  have  no  power  to  bind  the 
shareholders  personally,  or  to  call  upon  them  for  the  payment  of 
any  sum  of  money  or  any  assessment  whatever  other  than  such 
sums  as  they  may  at  any  time  personally  agree  to  pay  by  way  of 
subscription  to  new  shares  or  otherwise.  All  persons  or  corpora- 
tions extending  credit  to,  contracting  with,  or  having  any  claim 
against  the  Trustees  shall  look  only  to  the  funds  and  property  of 
the  trust  for  the  payment  of  any  such  contract  or  claim,  or  for 
the  payment  of  any  debt,  damage,  judgment,  or  decree,  or  of 
any  money  that  may  otherwise  become  due  or  payable  to  them 
from  the  Trustees,  so  that  neither  the  Trustees,  shareholders,  nor 
officers,  present  or  future,  shall  be  personally  liable  therefor. 

In  every  written  order,  contract,  or  obligation  which  the  Trus- 
tees or  officers  shall  give,  authorize,  or  enter  into,  it  shall  be  the 
duty  of  the  Trustees  and  officers  to  stipulate,  or  cause  to  be 
stipulated,  that  neither  the  Trustees,  officers,  nor  shareholders 
shall  be  held  to  any  personal  liability  under  or  by  reason  of  such 
order,  contract  or  obligation. 

It  is  further  expressly  agreed  that  in  case  any  Trustee,  offi- 
cer, or  shareholder  shall  at  any  time  for  any  reason  be  held  to 
or  be  under  any  personal  liability  as  such  Trustee,  officer,  or  share- 
holder, not  due  to  his  acts  in  bad  faith,  then  such  Trustee,  offi- 
cer, or  shareholder,  shall  be  held  harmless  and  indemnified  out  of 
the  trust  estate  from  and  of  all  loss,  cost,  damage,  or  expense  by 
reason  of  such  liability;  and,  if  at  any  time  the  trust  estate  shall 
be  insufficient  to  provide  for  such  indemnity  and  to  satisfy  all 
liabilities  of  and  claims  upon  it,  then  the  trust  estate  shall,  in 
preference  and  priority  over  any  and  all  other  claims  or  liens 
whatsoever,  except  mortgages,  and  except  as  otherwise  expressly 
provided  by  law,  be  applied  first  to  the  indemnification  of  the 
Trustees  from  any  loss,  cost,  damage  or  expense  in  connection 
with  any  personal  liability  which  they  may  be  under  or  have  in- 
curred except  as  aforesaid;  next,  to  the  indemnification  in  the 
same  manner  of  Iho  officers,  and  thereafter  to  the  indemnifica- 
tion in  like  manner  of  the  shareholders. 


SECURITIES-ISSUING    ORGANIZATIONS     553 

SIXTEENTH.  This  trust  shall  continue  for  the  term  of 
twenty-one  years  after  the  death  of  the  last  survivor  of  the  per- 
sons whose  names  are  signed  hereto,  at  which  time  the  then 
Trustees  shall  proceed  to  wind  up  its  affairs,  liquidate  its  assets, 
and  distribute  the  same  among  the  holders  of  preferred  and  com- 
mon shares:  provided,  however,  that,  if  prior  to  the  expiration 
of  said  period  the  holders  of  at  least  two-thirds  of  the  shares  then 
outstanding  shall,  at  a  meeting  called  for  that  purpose,  vote  to 
terminate  or  continue  this  trust,  then  said  trust  shall  either  forth- 
with terminate  or  continue  in  existence  for  such  further  period 
as  may  then  be  determined.  For  the  purpose  of  winding  up  their 
affairs  and  liquidating  this  trust  the  then  Trustees  shall  continue 
in  office  until  such  duties  have  been  fully  performed. 

SEVENTEENTH.  This  Agreement  and  Declaration  of  Trust 
may  be  amended  or  altered  in  any  particular  whatsoever,  except 
as  regards  the  exemption  from  personal  liability  of  the  Trustees, 
officers,  and  shareholders,  and  except  as  regards  the  priorities  of 
the  preferred  shares,  at  any  annual  or  special  meeting  of  the 
shareholders,  with  the  consent  of  the  holders  of  at  least  two- 
thirds  of  the  shares  of  each  class  then  outstanding,  provided 
notice  of  the  proposed  amendment  or  alteration  shall  have  been 
given  in  the  call  for  the  meeting:  and  in  case  of  such  alteration 
or  amendment  the  same  shall  be  attached  to  and  made  a  part 
of  this  agreement,  and  a  copy  thereof,  with  a  certificate  of  the 
Secretary  as  to  its  adoption,  shall  be  ffied  with  the  Trust  Com- 
pany at  that  time  having  the  custody  of  the  duplicate  original 
of  this  instrument. 

Nothing  in  this  article  contained  shall  in  any  way  be  construed 
to  limit  the  power  to  increase  or  reduce  the  number  of  shares 
as  provided  in  the  ninth  article  hereof. 

EIGHTEENTH.  A  duplicate  original  of  this  Agreement  and 
Declaration  of  Trust  shall  be  deposited  with  such  Trust  Company 
in  the  City  of  Boston  as  the  Trustees  may  from  time  to  time 
designate,  and  the  Trustees  shall  have  power  at  any  time  to 
change  the  company  with  which  such  duplicate  original  is 
deposited. 

NINETEENTH.  The  Trustees  from  time  to  time  shall  de- 
termine whether  and   to  what   extent   and  at   what  time,   and 


554  SUPPLEMENTARY    FORMS 

placed  under  what  conditions  and  regulations  the  accounts  and 
books  of  the  Trustees  or  any  of  them  shall  be  open  to  the  inspec- 
tion of  the  shareholders,  and  no  shareholder  shall  have  any  right 
to  inspect  any  account  of  book  or  document  of  the  Trustees  ex- 
cept as  authorized  by  the  Trustees  or  by  resolution  of  the 
shareholders. 

IN  WITNESS  WHEREOF,  the  said  Charles  Francis 
Adams,  2d,  Walter  Cabot  Baylies,  Samuel  Carr,  Robert  Clarence 
Pruyn,  Joseph  Ballister  Russell,  Frederic  Elmer  Snow,  Charles 
Augustus  Stone,  Albert  Strauss,  Christopher  Minot  Weld,  and 
Robert  Winsor,  Trustees  hereinbefore  mentioned,  have  hereunto 
set  their  hands  and  seals  in  token  of  their  acceptance  of  the  trust 
hereinbefore  mentioned,  for  themselves  and  their  successors,  and 
the  said  Francis  H.  Peabody,  Frank  G.  Webster,  Frank  E.  Pea- 
body,  and  Robert  Winsor,  co-partners,  carrying  on  business  in 
the  City  of  Boston  under  the  name  of  Kidder,  Peabody  &  Com- 
pany, and  James  Seligman,  Emil  Carlebach,  Albert  Strauss  and 
Frederick  Strauss,  co-partners,  carrying  on  business  in  the  City 
of  New  York,  under  the  name  of  J.  &  W.  Seligman  &  Company, 
have  hereunto  set  their  hand  and  seals  in  token  of  their  assent  to 
and  approval  of  said  terms  of  trust,  for  themselves  and  their 
assigns,  the  day  and  year  first  above  written. 

(The  signatures  and  seals  of  the  above  mentioned  persons  which 
appear  at  this  point  in  the  original  followed  by  a  notarial  seal 
are  here  omitted). 

Sept.  25th,  1902. 

We,  the  undersigned.  Trustees  under  an  Agreement  and  Dec- 
laration of  Trust  of  the  Massachusetts  Gas  Companies  dated  the 
25th  day  of  September,  1902,  hereby  acknowledge  that  we  have 
received  due  notice  of  the  meeting  of  said  Trustees  to  be  held  at 
115  Devonshire  St.,  Boston,  Mass.,  on  the  25th  day  of  September, 
1902,  at  10  o'clock  a.m.,  for  the  purposes  of  organization,  in- 
cluding the  election  of  officers,  adoption  of  by-laws  and  transac- 
tion of  business  incidental  thereto,  for  the  purpose  of  considering 
and  acting  upon  a  proposition  from  Kidder,  Peabody  &  Com- 
pany and  J.  &  W.  Seligman  &  Company  relative  to  the  trans- 
fer to  the  Massachusetts  Gas  Companies  of  certain  properties 
and  cash  as  mentioned  in  the  Declaration  of  Trust  of  said  Massa- 


COMBINATION    ORGANIZATION    FORMS       555 

chusetts  Gas  Companies,  and  taking  such  action  as  may  be  neces- 
sary to  carry  the  same  into  effect  if  the  offer  contained  in  said 
proposition  is  accepted;  and  we  hereby  consent  and  agree  that 
said  meeting  shall  be  held  at  the  time  and  place  above  mentioned 
for  the  purpose  above  stated. 
(Signed) 

Charles  Francis  Adams,  2nd. 
Walter  Cabot  Baylies 
Robert  Clarence  Pruyn 
Joseph  Ballister  Russell 
Frederic  Elmer  Snow 
Charles  Augustus  Stone 
Albert  Strauss 
Christopher  Minot  Weld 
Robert  Winsor. 
Samuel  Carr. 

The  stationery  of  the  Massachusetts  Gas  Companies  has 
printed  in  red  ink  in  the  upper  right  hand  corner,  the  following: 

"  The  name  'Massachusetts  Gas  Companies  '  is  the  designation 
of  the  Trustees  for  the  time  being  under  an  agreement  and  dec- 
laration of  Trust,  dated  1902,  and  all  persons  dealing  with  the 
Massachusetts  Gas  Companies  must  look  solely  to  the  Trust 
property  for  the  enforcement  of  any  claim  against  the  Companies, 
as  neither  the  Trustees,  Officers  nor  Shareholders  assume  any 
personal  liability  for  obligations  entered  into  on  behalf  of  the 
Companies. 

C.    FORMS   PERTAINING    TO  COMBINATION 
ORGANIZATIONS 

FORM   57 

FACTOR'S  AGREEMENT 

National  Wall  Paper  Company  ^ 

Memorandum  of  agreement  between of 

(called  the  purchaser)   and  the  National  Wall  Paper  Company 
of  New  York,  N.  Y.,  (called  the  company). 

1  Op.  cit.  N.  Y.  Trust  Investigation,  1897,  pp.  804-806. 


556  SUPrLEMENTARY    FORMS 

1.  The  purchaser  agrees  to  select  and  order  from  and  out  of 
jobbing  Hues  of  the  machine  made  goods  of  the  company  on  or 
before  October   1,   1896,  wall   paper  to  the  aggregate   amount 

of  $ ,  which   hereby  request  the  company 

to  manufacture  for prior  to  April  1,  1897,  goods 

to  be  delivered  F.  0.  B.  at  New  York,  or  at  the  respective  places 
of  manufacture. 

2.  The  terms  of  this  sale  are  four  (4)  months  from  date  of 
invoice,  with  a  discount  at  the  rate  of  one  per  cent  per  month 
for  anticipated  payments.  Goods  shipped  between  October  15th 
and  March  1st  to  date  from  March  1st,  and  orders  for  goods 
not  shipped  before  March  1,  1897,  may  be  cancelled  by  either 
party  to  this  agreement. 

3.  The  purchasers  expressly  guarantee  and  agree  that  between 
September  1,  1896,  and  June  30,  1897,  will  not  purchase  or 
acquire  any  wall  paper  or  hangings  the  product  of  any  person 
or  corporation  other  than  the  company,  and  that  will  give  addi- 
tional and  duplicate  orders  prior  to  July  1,  1897,  to  the  amount 

of  $ ,  and  in  consideration  of  such  guarantee  and 

upon  the  performance  thereof  company  shall  credit  the  purchaser 
with  the  discounts  hereinafter  named  on  the  attached  schedule  on 
all  purchases  from  the  jobbing  lines  of  the  macliine  made  goods 
of  the  company  between  said  dates.^  Such  discounts  shall  be 
figured  and  credited  upon  the  basis  of  the  shipments  made  here- 
under and  the  discounts  shall  be  calculated  upon  the  gross  prices 
published  by  the  company  in  its  price  list  for  the  patterns 
selected  by  the  purchaser.  The  purchasers  guarantee  as  a  con- 
dition of  the  allowance  of  such  discounts  to  refrain  from  making 
such  use  thereof  among  the  trade  as  to  interfere  with  the  uni- 
formity of  the  company's  price  and  terms,  and  that  (the  pur- 
chaser) will  at  all  times  during  this  contract  maintain  the 
company's  road  prices. 

4.  The  company  agrees  to  extend  the  same  line  of  discounts 
referred  to  above  to  such  goods  as  arc  contained  in  the  exclusive 
lines  of  the  machine  made  goods  of  the  company,  on  the  express 
guarantee  that  such  goods  will  be  used  only  for  the  retail  depart- 
ment of  the  purchaser  in  the  City  of ,  and 

will  not  be  offered  at  wholesale  within  his  store  or  on  the  road. 

2  Tills  sentence  is  thus  in  original.  —  Ed. 


COMBINATION    ORGANIZATION    FORMS       557 

This  contract  shall  at  all  times  and  for  every  purpose  be  deemed 
to  have  been  made  and  executed  at  the  principal  office  of  the 
company,  in  the  City  of  New  York,  and  it  shall  for  every  purpose 
be  construed  under  the  laws  of  the  State  of  New  York. 

Dated,  the  city  of  New  York 1896. 


National  Wall  Paper  Company, 
President. 

FORM    58 

A  TYPICAL  POOL  AGREEMENT 

The  Steel  Rail  Pool  ^ 

Memorandum  of  agreement,  entered  into  August  2,  1887,  by 
and  between  the  North  Chicago  Rolling  Mill  Company,  the 
Cambria  Iron  Company,  the  Pennsylvania  Steel  Company,  the 
Union  Steel  Company,  the  Lackawanna  Iron  and  Coal 
Company,  the  Joliet  Steel  Company,  the  Western  Steel  Company, 
the  Cleveland  Rolling  Mill  Company,  Carnegie  Brothers  &  Co., 
Limited;  Carnegie,  Phipps  &  Co.,  Limited;  the  Bethlehem  Iron 
Company,  the  Scranton  Steel  Company,  the  Troy  Steel  &  Iron 
Company,  the  Worcester  Steel  Works  and  the  Springfield  Iron 
Company. 

We,  the  before-named  companies  and  corporations,  manu- 
facturers of  steel  rails,  hereby  mutually  agree  one  with  the  other, 
that  we  will  restrict  our  sales  and  the  product  of  the  steel  rails 
of  50  pounds  to  the  yard  and  upward,  applying  to  orders  taken 
by  us  and  to  be  delivered  by  us  or  from  our  respective  works 
during  the  year  1888,  as  hereinafter  allotted  and  limited;  and  we 
respectively  bind  ourselves  not  to  sell  in  excess  of  our  current 
allotments,  without  first  obtaining  the  consent  of  the  Board  of 
Control  thereto  —  that  is  to  say: 

It  is  agreed,  there  shall  now  be  made  an  allotment  of  800,000 
tons  of  rails,  which  shall  be  divided  and  apportioned  to  and 
among  the  several  parties  hereto  to  be  sold  by  them  during  the 
year  1888,  under  the  following  basis  of  percentages,  to  wit;  North 

1  Report  of  the  Commissioner  of  Corporations  on  the  Steel  In* 
dustry.    Part  1,  pp.  69-71. 


558  SUPPLEMENTARY    FORMS 

Chicago  Rolling  Mill  Company,  12  1/2  per  cent;  Pennsylvania 
Steel  Company,  9  8/10  per  cent;  Bethlehem  Iron  Company, 
9  per  cent;  Carnegie  Bros.  &  Co.,  Limited,  and  Carnegie, 
Phipps  &  Co.,  Limited  (jointly),  13  5/10  per  cent;  Joliet  Steel 
Company,  8  per  cent;  Lackawanna  Iron  and  Coal  Company, 
9  per  cent;  Cambria  Iron  Company  8  per  cent;  Scranton  Steel 
Company,  S  per  cent;  the  Union  Steel  Company,  8  per  cent; 
Cleveland  Rolling  Mill  Company,  4  8/10  per  cent;  Troy  Steel 
&,  Iron  Company,  4  5/10  per  cent;  Western  Steel  Company, 
4  5/10  per  cent;  Worcester  Steel  Works,  1  4/10  per  cent. 

And  in  addition  to  the  said  allotment  of  800,000  tons  of  rails 
above  allotted,  an  additional  allottment  of  250,000  tons  is  hereby 
made  and  allotted  to  the  Board  of  Control,  to  be  reallotted  and 
reapportioned  by  it,  as,  and  to  whom,  it  may  deem  equitable,  in 
the  adjustment  of  any  differences  that  may  arise.  It  being  also 
further  agreed  that  all  subsequent  allotments  of  rails  hereafter 
made,  to  be  sold  under  this  agreement  during  the  year  1888,  shall 
also  be  divided  and  apportioned  to  the  several  parties  hereto  in 
the  same  ratio  of  percentages  as  said  apportionment  of  800,000 
tons  is  herein  chvided  and  apportioned. 

It  is  further  agreed,  that  the  Board  of  Control  shall,  from  time 
to  time,  make  such  further  allotments  as  shall  be  necessary  to  at 
all  times  keep  the  unsold  allotments  at  least  200,000  tons  in 
excess  of  the  total  current  sales,  as  shown  by  the  monthly  reports 
of  sales.  This  is  to  be  in  addition  to  the  then  imappropriated 
part  of  the  250,000  tons  herein  before  allotted  to  the  Board  of 
Control  to  adjust  differences. 

It  is  further  agreed,  on  the  first  day  of  April,  July  and  October, 
the  Board  of  Control  are  authorized  and  directed  to  cancel  such 
part  of  the  unmade  allotments  of  the  respective  parties  hereto 
as  they,  the  said  Board  of  Control,  shall  determine  such  party 
unable  to  make  in  due  time,  and  all  allotments  so  canceled  the 
Board  of  Control  shall  have  the  right  to  reallot  to  any  of  the 
other  parties  hereto;  it  being  understood  that  all  such  cancella- 
tions shall  apply  only  to  allotments  standing  to  the  credit  of  the 
respective  parties  hereto  on  the  dates  above  named,  but  no 
reallotment  as  aforesaid  shall  be  made  by  the  Board  of  Control 
to  any  of  the  parties  hereto  for  the  purpose  of  enabling  them  or 
any  of  them,  to  make  and  sell  rails  from  foreign  made  blooms. 


COMBINATION    ORGANIZATION    FORMS       559 

It  is  further  agreed,  that  all  transfers  of  parts  of  allotments 
from  one  party  to  another  shall  be  made  by  the  Board  of  Control. 

It  is  further  agreed,  that  there  shall  be  a  Board  of  Control, 
consisting  of  three  members,  namely  Orrin  W.  Potter,  Luther  S. 
Bent  and  W.  W.  Thurston,  who  shall  have  power  to  employ 
a  paid  secretary  and  treasurer. 

It  is  further  agreed,  that  the  Board  of  Control,  upon  the 
written  consent  of  75  per  cent  of  the  percentages  as  hereinbefore 
named,  shall  increase  the  allotments  for  the  year  1888,  and  such 
increase  shall  be  allotted  to  the  parties  hereto  as  hereinbefore 
provided. 

It  is  further  agreed,  that  each  party  whose  name  is  hereunto 
annexed,  shall  and  will  make  monthly  returns  to  the  Board  of 
Control  of  all  contracts  for  delivery  of  rails  of  50  pounds  to  the 
yard  and  upward  during  the  year  1888,  and  also  of  all  shipments  , 
of  such  rails  made  by  them  during  said  year;  a  copy  of  such 
return  shall  be  furnished  to  each  party  hereto. 

It  is  further  agreed,  that  all  the  parties  hereto  shall  and  will, 
on  or  before  January  15,  1888,  make  a  written  return  to  the 
Board  of  Control  of  all  the  rails  of  50  pounds  to  the  yard  and 
upward  (designating  the  weight)  which  they  respectively  had 
on  hand  January  1,  1888,  stating  whether  the  same  are  sold, 
and  if  sold  on  what  order  they  apply. 

It  is  further  agreed,  that  the  Board  of  Control  shall  have  the 
right  whenever  they  deem  it  expedient  to  convene  a  meeting  of 
the  parties  hereto,  and  they  shall  give  at  least  ten  days'  previous 
notice  of  all  meetings,  and  any  business  transacted  at  such  meet- 
ings, and  receiving  75  per  cent  of  the  votes  present  thereat,  either 
in  person  or  by  proxy,  shall  be  binding  on  all  the  parties  hereto, 
excepting  as  to  a  change  in  percentages  as  aforesaid: 

The  Board  of  Control  shall  be  required  to  call  a  meeting 
of  the  parties  hereto  when  requested  so  to  do  in  writing,  signed 
liy  any  three  of  the  contracting  parties,  but  such  request  and 
such  notice  shall  state  the  object  for  which  such  meeting  is  called. 

It  shall  be  the  duty  of  the  Board  of  Control  to  have  a  proper 
record  kept  of  all  the  returns  made  to  it,  with  power  from  time 
to  time  to  change  the  form  of  return  as  they  may  deem  expedient. 

The  Board  of  Control  shall  have  authority  to  levy  an  assess- 


560  SUPPLEMENTARY    FORMS 

ment,  pro  rata  to  the  allotted  tonnage,  to  defray  the  actual  ex- 
penses made  necessary  to  carry  out  this  agreement. 

It  is  further  agreed,  that  we  will,  respectively,  immediately 
make  return  to  the  Board  of  Control  of  all  rails  of  50  pounds 
to  the  yard  and  upward  which  we  are  now  under  contract  to 
deliver  during  the  year  1888,  said  return  to  state  to  whom  such 
rails  are  sold  and  when  they  are  to  be  delivered. 

(Signatures) 


FORM  59 

STANDARD  OIL  TRUST  AGREEMENT  AND  SUPPLE- 
MENTAL TRUST  AGREEMENT  OF  1882  i 

This  agreement,  made  and  entered  upon  this  second  day  of 
January,  a.d.  1882,  by  and  between  all  the  persons  who  shall 
now  or  may  hereafter  execute  the  same  as  parties  thereto, 
witnesseth : 

I.  It  is  intended  that  the  parties  to  this  agreement  shall  em- 
brace three  classes,  to  wit: 

(1)  All  the  stockholders  and  members  of  the  following  cor- 
porations and  limited  partnerships,  to  wit: 

Acme  Oil  Co.  (New  York),  Acme  Oil  Co.  (Pennsylvania), 
Atlantic  Refining  Co.,  of  Phila.;  Bush  &  Co.,  Limited,  Camden 
Consolidated  Oil  Co.,  Elizabethport  Acid  Works,  Imperial  Re- 
fining Co.,  Limited,  Chas.  Pratt  &  Co.,  Paine,  Ablett  &  Co., 
Limited,  Standard  Oil  Co.  (Ohio),  Standard  Oil  Co.  (Pittsburgh), 
Smith's  Ferry  Oil  Trans.  Co.,  Solar  Oil  Co.,  Limited,  Sone  & 
Fleming  Mfg.  Co.,  Limited. 

Also  all  the  stockholders  and  members  of  such  other  corpora- 
tions and  limited  partnerships  as  may  hereafter  join  in  this 
agreement  at  the  request  of  the  trustees  herein  provided  for. 

(2)  The  following  individuals,  to  wit: 

W.  C.  Andrews,  John  D.  Archbold,  Lide  K.  Arter,  J.  A. 
Bostwick,  Benj.  Brewster,  D.  Bushnell,  Thomas  C.  Bushnell. 
J.  N.  Camden,  Henry  L.  Davis,  H.  M.  Flagler,  Mrs.  H.  M. 
Flagler,  H.  M.  Hanna,  and  George  W.  Chapin,  D.  M.  Harkness, 

1  Appendix.  Report  of  Industrial  Commission,  Vol.  1,  pp.  1221- 
26. 


COMBINATION    ORGANIZATION    FORMS       561 

D.  M.  Harkness,  trustee;  S.  V.  Harkness,  John  Huntington,  H.  A. 
Hutchins,  Chas.  F.  G.  Heye,  0.  B.  Jennings,  Chas.  Lockhart, 
A.  M.  McGregor,  Wm.  M.  Macy,  Wm.  H.  Macy,  Jr.,  estate  of 
Josiah  Macy,  Jr.,  Wm.  H.  Macy,  Jr.,  executor;  0.  H.  Payne,  0.  H. 
Payne,  trustee;  Chas.  Pratt,  Horace  A.  Pratt,  C.  M.  Pratt,  A.  J. 
Pouch,  John  D.  Rockefeller,  Wm.  Rockefeller,  Henry  H.  Rogers, 
W.  P.  Thompson,  J.  J.  Vandergrift,  Wm.  T.  Wardwall,  W.  G. 
Warden,  Josiah  L.  Warden;  Warden,  Frew  &  Co.,  Louise  C. 
Wheaton,  Julia  H.  York,  George  H.  Vilas,  M.  R.  Keith,  Geo.  F. 
Chester,  trustees. 

Also  all  such  individuals  as  may  hereafter  join  in  this  agree- 
ment at  the  request  of  the  trustees  herein  provided  for. 

(3)  A  portion  of  the  stockholders  and  members  of  the  follow- 
ing corporations  and  limited  partnerships,  to  wit : 

American  Lubricating  Oil  Co.,  Baltimore  United  Oil  Co., 
Beacon  Oil  Co.,  Bush  &  Denslow  Manuf'g  Co.,  Central  Refining 
Co.,  of  Pittsburgh;  Chesbrough  Manuf'g  Co.,  Chess-Carley  Co., 
Consolidated  Tank  Line  Co.,  Inland  Oil  Co.,  Keystone  Refining 
Co.,  Maverick  Oil  Co.,  National  Transit  Co.,  Portland  Kerosene 
Oil  Co.,  Producers'  Con'd  Land  and  Petroleum  Co.,  Signal  Oil 
Works,  Limited,  Thompson  and  Bedford  Co.,  Limited,  Devoe 
Manuf'g  Co.,  Eclipse  Lubricating  Oil  Co.,  Limited,  Empire  Re- 
fining Co.,  Limited,  Franklin  Pipe  Co.,  Limited,  Galena  Oil 
Works,  Limited,  Galena  Farm  Oil  Co.,  Limited,  Germania  Mining 
Co.,  Vacuum  Oil  Co.,  H.  C.  Van  Tine  &  Co.,  Limited,  Waters- 
Pierce  Oil  Co. 

Also  stockholders  and  members  (not  being  all  thereof)  of  other 
corporations  and  limited  partnerships  who  may  hereafter  join 
in  this  agreement  at  the  request  of  the  trustees  herein  provided 
for. 

II.  The  parties  hereto  do  covenant  and  agree  to  and  with  each 
other,  each  in  consideration  of  the  mutual  covenants  and  agree- 
ments of  the  others,  as  follows: 

(1)  As  soon  as  practicable  a  corporation  shall  be  formed  in 
each  of  the  following  States,  under  the  laws  thereof,  to  wit : 
Ohio,  New  York,  Pennsylvania  and  New  Jersey;  Provided,  how- 
ever, that  instead  of  organizing  a  new  corporation,  any  existing 
charter  and  organization  may  be  used  for  the  purpose  when  it 
can  advantageously  be  done. 


562  SUPPLEMENTARY    FORMS 

(2)  The  purposes  and  powers  of  said  corporations  shall  be  to 
mine  for,  produce,  manufacture,  refine,  and  deal  in  petroleum  and 
all  its  products,  and  all  the  materials  used  in  such  business,  and 
transact  other  business  collateral  thereto.  But  other  purposes 
and  powers  shall  be  embraced  in  the  several  charters  such  as 
shall  seem  expedient  to  the  parties  procuring  the  charter,  or,  if 
necessary  to  comply  with  the  law,  the  powers  aforesaid  may  be 
restricted  and  reduced. 

(3)  At  any  time  hereafter,  when  it  may  seem  advisable  to  the 
trustees  herein  provided  for,  similar  corporations  may  be  formed 
in  other  States  and  Territories. 

(4)  Each  of  said  corporations  shall  be  known  as  the  Standard 

Oil  Co.  of (and  here  shall  follow  the  name 

of  the  State  or  Territory  by  virtue  of  the  laws  of  which  said 
corporation  is  organized). 

(5)  The  capital  stock  of  each  of  said  corporations  shall  be 
fixed  at  such  an  amount  as  may  seem  necessary  and  advisable  to 
the  parties  organizing  the  same,  in  view  of  the  purpose  to  be 
accomplished. 

(6)  The  shares  of  stock  of  each  of  said  corporations  shall  be 
issued  only  for  money,  property,  or  assets  equal  at  a  fair  valua- 
tion to  the  par  value  of  the  stock  delivered  therefor. 

(7)  All  of  the  property,  real  and  personal,  assets,  and  business 
of  each  and  all  of  the  corporations  and  limited  partnerships 
mentioned  or  embraced  in  class  (1)  shall  be  transferred  to  and 
vested  in  the  said  several  Standard  Oil  companies.  All  of  the 
property,  assets,  and  business  in  or  of  each  particular  State 
shall  be  transferred^  to  and  vested  in  the  Standard  Oil  Co.  of  that 
particular  State,  and  in  order  to  accomplish  such  purposes  the 
directors  and  managers  of  each  and  all  of  the  several  corpora- 
tions and  limited  partnerships  mentioned  in  class  first  are  hereby 
authorized  and  directed  by  the  stockholders  and  members  thereof 
(all  of  them  being  parties  to  this  agreement)  to  sell,  assign, 
transfer,  convey,  and  make  over,  for  the  consideration  hereinafter 
mentioned,  to  the  Standard  Oil  Co.,  or  companies  of  the  proper 
State  or  States,  as  soon  as  said  corporations  are  organized  and 
ready  to  receive  the  same,  all  the  property,  real  and  personal, 
assets,  and  business  of  said  corporations  and  limited  partnerships. 


COMBINATION    ORGANIZATION    FORMS       563 

Correct  schedules   of  such   proi3erty,  assets,  and  business  shall 
accompany  each  transfer. 

(8)  The  individuals  embraced  in  class  second  of  this  agree- 
ment do  each  for  himself  agree,  for  the  consideration  hereinafter 
mentioned,  to  sell,  assign,  transfer,  convey,  and  set  over  all  the 
property,  real  and  personal,  assets,  and  business  mentioned  and 
embraced  in  schedules  accompanying  such  sale  and  transfer  to 
the  Standard  Oil  Company  or  Companies  of  the  proper  State  or 
States,  as  soon  as  the  said  corporations  are  organized  and  ready 
to  receive  the  same. 

(9)  The  parties  embraced  in  class  third  of  this  agreement  do 
covenant  and  agree  to  assign  and  transfer  all  of  the  stock  held  by 
them  in  the  corporations  or  limited  partnerships  herein  named, 
to  the  trustees  herein  provided  for,  for  the  consideration  and 
upon  the  terms  hereinafter  set  forth.  It  is  understood  and 
agreed  that  the  said  trustees  and  their  successors  may  hereafter 
take  the  assignment  of  stocks  in  the  same  or  similar  companies 
upon  the  terms  herein  provided,  and  that  whenever  and  as 
often  as  all  the  stocks  of  any  corporation  and  limited  partnership 
are  vested  in  said  trustees  the  proper  steps  may  then  be  taken 
to  have  all  the  money,  property,  real  and  personal,  of  said 
corporation  or  partnership  assigned  and  conveyed  to  the  Stand- 
ard Oil  Company  of  the  .proper  State  on  the  terms  and  in  the 
mode  herein  set  forth,  in  which  event  the  trustees  shall  receive 
stocks  of  the  Standard  Oil  Company  equal  to  the  value  of  the 
money,  property,  and  business  assigned,  to  be  held  in  place  of  the 
stocks  of  the  company  or  companies  assigning  such  property. 

(10)  The  consideration  for  the  transfer  and  conveyance  of  the 
money,  property,  and  business  aforesaid  to  each  of  any  of  the 
Standard  Oil  Companies  shall  be  stock  of  the  respective  Standard 
Oil  Company  to  which  said  transfer  or  conveyance  is  made, 
equal  at  par  value  to  the  appraised  value  of  the  money,  property, 
and  business  so  transferred.  Said  stock  shall  be  delivered  to 
the  trustees  hereinafter  provided  for,  and  their  successors,  and 
no  stock  of  any  of  said  companies  shall  ever  be  issued  except 
for  money,  property,  or  business  equal  at  least  to  the  par  value 
of  the  stock  so  issued,  nor  shall  any  stock  be  issued  by  any  of 
said  companies  for  any  purpose  except  to  the  trustees  herein 


564  SUPPLEMENTARY    FORMS 

provided  for,  to  be  held  subject  to  the  trusts  hereinafter  specified. 
It  is  understood,  however,  that  this  provision  is  not  intended 
to  restrict  the  purchase,  sale,  and  exchange  of  property  of  said 
Standard  Oil  Companies  as  fully  as  they  may  be  authorized  to  do 
by  their  respective  charters,  provided  only  that  no  stock  be 
issued  therefor  except  to  said  trustees. 

(11)  The  consideration  for  any  stock  delivered  to  said  trustees 
as  above  provided  for,  as  well  as  for  stocks  delivered  to  said 
trustees  by  persons  mentioned  or  included  in  class  third  of  this 
agreement,  shall  be  the  delivery  by  said  trustees,  to  the  persons 
entitled  thereto,  of  trust  certificates  hereinafter  provided  for, 
equal  at  par  value  to  the  par  value  of  the  stocks  of  the  said 
Standard  Oil  companies  so  received  by  said  trustees,  and  equal 
to  the  appraised  value  of  the  stocks  of  other  companies  or 
partnerships  delivered  to  said  trustees.  (The  said  appraised 
value  shall  be  determined  in  a  manner  agreed  upon  by  the  parties 
in  interest  and  said  trustees).  It  is  understood  and  agreed, 
however,  that  the  said  trustees  may,  with  any  trust  funds  in 
their  hands,  in  addition  to  the  mode  above  provided,  purchase 
the  bonds  and  stocks  of  other  companies  engaged  in  business 
similar  or  collateral  to  the  business  of  said  Standard  Oil  com- 
panies, on  such  terms  and  in  such  mode  as  they  may  deem  ad- 
visable, and  shall  hold  the  same  for  the  benefit  of  the  owners 
of  said  trust  certificates,  and  may  sell,  assign,  transfer,  and  pledge 
such  bonds  and  stocks  whenever  they  may  deem  it  advantageous 
to  said  trust  so  to  do. 

III.  The  trusts  upon  which  said  stocks  shall  be  held,  and  the 
number,  powers,  and  duties  of  said  trustees,  shall  be  as  follows: 

(1)  The  number  of  trustees  shall  be  nine. 

(2)  J.  D.  Rockefeller,  0.  H.  Payne,  and  Wm.  Rockefeller 
are  hereby  appointed  trustees,  to  hold  tlieir  office  until  the  first 
Wednesday  of  April,  .^.d.  1885. 

(3)  J.  A.  Bostwick,  H.  M.  Flagler,  and  W.  O.  Warden  are 
hercliy  appointed  trustees,  to  hold  their  office  until  the  first 
Wednesday  of  April,  a.d.  1884. 

(4)  Chas.  Pratt,  Benj.  Brewster,  and  John  D.  Archbold,  are 
hereby  appointed  trustees,  to  hold  office  until  the  first  Wednesday 
of  April,  A.D.  1883. 


COMBINATION    ORGANIZATION    FORMS       565 

(5)  Elections  for  trustees  to  succeed  those  herein  appointed 
shall  be  held  annually,  at  which  election  a  sufficient  number  of 
trustees  shall  be  elected  to  fill  all  vacancies  occurring  either  from 
expiration  of  the  term  of  office  of  trustees  or  from  any  other 
cause.  All  trustees  shall  be  elected  to  hold  their  office  for  three 
years,  except  those  elected  to  fill  a  vacancy  arising  from  any 
cause  except  expiration  of  term,  who  shall  be  elected  for  the 
balance  of  the  term  of  the  trustee  whose  place  they  are  elected 
to  fill.  Every  trustee  shall  hold  his  office  until  his  successor  is 
elected. 

(6)  Trustees  shall  be  elected  by  ballot  by  the  owners  of  trust 
certificates  or  their  proxies.  At  all  meetings  the  owners  of  trust 
certificates  who  may  be  registered  as  such  on  the  books  of  the 
trustees  may  vote  in  person  or  by  proxy,  and  shall  have  one 
vote  for  each  and  every  share  of  trust  certificates  standing  in 
their  names;  but  no  such  owner  shall  be  entitled  to  vote  upon  any 
share  which  has  not  stood  in  his  name  thirty  days  prior  to  the 
day  appointed  for  the  election.  The  transfer  books  may  be 
closed  for  thirty  days  immediately  preceding  the  annual  election. 
A  majority  of  the  shares  represented  at  such  election  shall  elect. 

(7)  The  annual  meeting  of  the  owners  of  said  trust  certifi- 
cates for  the  election  of  trustees  and  for  other  business  shall  be 
held  at  the  office  of  the  trustees  in  the  city  of  New  York  on  the 
first  Wednesday  of  April  of  each  year,  unless  the  place  of  meeting 
be  changed  by  the  trustees,  and  said  meeting  maj^  be  adjourned 
from  day  to  day  until  its  business  is  completed.  Special  meetings 
of  the  onwers  of  said  trust  certificates  may  be  called  by  the 
majority  of  the  trustees  at  such  times  and  places  as  they  may 
appoint.  It  shall  also  be  the  duty  of  the  trustees  to  call  a  special 
meeting  of  holders  of  trust  certificates  whenever  requested  to  do 
so  by  a  petition  signed  by  the  holders  of  10  per  cent  in  value  of 
such  certificates.  The  business  of  such  special  meetings  shall  be 
confined  to  the  object  specified  in  the  notice  given  therefor. 
Notice  of  the  time  and  place  of  all  meetings  of  the  owners  of 
trust  certificates  shall  be  given  by  personal  notice  as  far  as  pos- 
sible and  by  public  notice  in  one  of  the  principal  newspapers  in 
each  State  in  which  a  Standard  Oil  Co.  exists  at  least  ten  days 
before  such  meeting.    At  any  meeting  a  majority  in  the  value  of 


566  SUPPLEMENTARY    FORMS 

the  holders  of  trust  certificates  rei^resented  consenting  thereto, 
by-laws  may  be  made,  amended,  or  repealed  relative  to  the  mode 
of  election  of  trustees  and  other  business  of  the  holders  of  trust 
certificates;  provided,  however,  that  said  by-laws  shall  be  in 
conformity  with  this  agreement.  By-laws  may  also  be  made, 
amended,  and  repealed  at  any  meeting,  by  and  with  the  consent 
of  a  majority  in  value  of  the  holders  of  trust  certificates,  which 
alter  this  agreement  relative  to  the  number,  powers,  and  duties 
of  the  trustees  and  to  other  matters  tending  to  the  more  efficient 
accomplishment  of  the  objects  for  which  the  trust  is  created, 
provided  only  that  the  essential  intents  and  purposes  of  this 
agreement  be  not  thereby  changed. 

(8)  Whenever  a  vacancy  occurs  in  the  board  of  trustees 
more  than  sixty  days  prior  to  the  annual  meeting  for  the  election 
of  trustees,  it  shall  be  the  duty  of  the  remaining  trustees  to  call 
a  meeting  of  the  owners  of  the  Standard  Oil  Trust  certificates 
for  the  purpose  of  electing  a  trustee  or  trustees  to  fill  the  vacancy 
or  vacancies.  If  any  vacancy  occurs  in  the  board  of  trustees, 
from  any  cause,  within  sixty  days  of  the  date  of  the  annual 
meeting  for  the  election  of  trustees,  the  vacancy  may  be  filled 
by  a  majority  of  the  remaining  trustees,  or,  at  their  option,  may 
remain  vacant  until  the  annual  election. 

(9)  If,  for  any  reason,  at  any  time,  a  trustee  or  trustees 
shall  be  appointed  by  any  court  to  fill  any  vacancy  or  vacancies 
in  said  board  of  trustees,  the  trustee  or  trustees  so  appointed 
shall  hold  his  or  their  respective  office  or  offices  only  until  a 
successor  or  successors  shall  be  elected  in  the  manner  above 
provided  for. 

(10)  Whenever  any  change  shall  occur  in  the  board  of  trustees, 
the  legal  title  to  the  stock  and  other  property  held  in  trust  shall 
pass  to  and  vest  in  the  successors  of  said  trustees  without  formal 
transfer  thereof;  but  if  any  time  such  formal  transfer  shall  be 
deemed  necessary  or  advisable  it  shall  be  the  duty  of  the  board 
of  trustees  to  obtain  the  same,  and  it  shall  be  the  duty  of  any 
retiring  trustee,  or  the  administrator  or  executor  of  any  deceased 
trustee,  to  make  said  transfer. 

(11)  The  trustees  shall  prepare  certificates  which  shall  show 
the  interest  of  each  beneficiary  in  said  trust,  and  deliver  them 


COMBINATION    ORGANIZATION    FORMS       567 

to  the  persons  properly  entitled  thereto.  They  shall  be  divided 
into  shares  of  the  par  value  of  $100  each,  and  shall  be  known 
as  "  Standard  Oil  Trust  certificates,"  and  shall  be  issued  sub- 
ject to  all  the  terms  and  conditions  of  this  agreement.  The 
trustees  shall  have  power  to  agree  upon  and  direct  the  form  and 
contents  of  said  certificates,  and  the  mode  in  which  they  shall 
be  signed,  attested  and  transferred.  The  certificates  shall  contain 
an  express  stipulation  that  the  holders  thereof  shall  be  bound  by 
the  terms  of  this  agreement,  and  by  the  by-laws  herein  provided 
for. 

(12)  No  certificates  shall  be  issued  except  for  stocks  and 
bonds  held  in  trust,  as  herein  provided  for,  and  the  par  value  of 
certificates  issued  by  said  trustees  shall  be  equal  to  the  par  value 
of  the  stocks  of  said  Standard  Oil  Companies,  and  the  appraised 
value  of  other  bonds  and  stocks  held  in  trust.  The  various  bonds, 
stocks,  and  moneys  held  under  said  trust  shall  be  held  for  all 
parties  in  interest  jointly,  and  the  trust  certificates  so  issued  shall 
be  the  evidence  of  the  interest  held  by  the  several  parties  in 
this  trust.  No  duplicate  certificates  shall  be  issued  by  the  trustees 
except  upon  the  surrender  of  the  original  certificate  or  certificates 
for  cancellation,  or  upon  satisfactory  proof  of  the  loss  thereof, 
and  tn  the  latter  case  they  shall  require  a  sufficient  bond  of 
indemnity. 

(13)  The  stocks  of  the  various  Standard  Oil  Companies  held 
in  trust  bj^  said  trustees  shall  not  be  sold,  assigned,  or  transferred 
by  said  trustees,  or  by  the  beneficiaries,  or  by  both  combined, 
so  long  as  the  trust  endures.  The  stocks  and  bonds  of  other 
corporations  held  by  said  trustees  may  be  by  them  exchanged 
or  sold  and  the  proceeds  thereof  distributed  pro  rata  to  the 
holders  of  trust  certificates,  or  said  proceeds  may  be  held  and  re- 
invested by  said  trustees  for  the  purposes  and  uses  of  the  trust; 
provided,  however,  that  said  trustees  may  from  time  to  time 
assign  such  shares  of  stock  of  said  Standard  Oil  Companies  as  may 
be  necessary  to  quaUfy  any  person  or  persons  chosen  or  to  be 
chosen  as  chrectors  and  officers  of  any  of  said  Standard  Oil 
Companies. 

(14)  It  shall  be  the  duty  of  said  trustees  to  receive  and  safely 
to  keep  all  interest  and  dividends  declared  and  paid  upon  any  of 


568  SUPPLEMENTARY    FORMS 

the  said  bonds,  stocks,  and  moneys  held  by  them  in  trust,  and  to 
distribute  all  moneys  received  from  such  sources  or  from  sales  of 
trust  property  or  otherwise  by  declaring  and  paying  dividends 
upon  the  Standard  Trust  certificates  as  funds  accumulate,  which 
in  their  judgment  are  not  needed  for  the  uses  and  expenses  of 
said  trust.  The  trustees  shall,  however,  keep  separate  accounts 
and  receipts  from  interest  and  dividends,  and  of  receipts  from 
sales  or  transfers  of  trust  property,  and  in  making  any  distribu- 
tion of  trust  funds,  in  which  moneys  derived  from  sales  or  trans- 
fers shall  be  included,  shall  render  the  holders  of  trust  certificates 
a  statement  showing  what  amount  of  the  fund  distributed  has 
been  derived  from  such  sales  or  transfers.  The  said  trustees  may 
be  also  authorized  and  empowered  by  a  vote  of  a  majority  in 
value  of  holders  of  trust  certificates,  whenever  stocks  or  bonds 
have  accumulated  in  their  hands  from  money  purchases  thereof, 
or  the  stocks  and  bonds  held  by  them  have  increased  in  value, 
or  stock  dividends  shall  have  been  declared  by  any  of  the 
companies  whose  stocks  are  held  by  said  trustees,  or  when- 
ever from  any  such  cause  it  is  deemed  advisable  so  to  do,  to 
increase  the  amount  of  trust  certificates  to  the  extent  of  such 
increase  or  accumulation  of  values  and  to  divide  the  same  among 
the  persons  then  owning  trust  certificates  pro  rata. 

(15)  It  shall  be  the  duty  of  said  trustees  to  exercise  general 
supervision  over  the  affairs  of  said  several  Standard  Oil  Com- 
panies, and  as  far  as  practicable  over  the  other  companies  or 
partnerships,  any  portion  of  whose  stock  is  held  in  said  trust. 
It  shall  be  their  duty  as  stockholders  of  said  companies  to  elect 
as  directors  and  officers  thereof  faithful  and  competent  men. 
They  may  elect  themselves  to  such  positions  when  they  see  fit 
so  to  do,  and  shall  endeavor  to  have  the  affairs  of  said  companies 
managed  and  directed  in  the  manner  they  may  deem  most  con- 
ducive to  the  best  interests  of  the  holders  of  said  trust  certificates. 

(16)  All  the  powers  of  the  trustees  may  be  exercised  by  a 
majority  of  their  number.  They  may  appoint  from  their  own 
number  an  executive  and  other  committees.  A  majority  of  each 
committee  shall  exercise  all  the  powers  which  the  trustees  may 
confer  upon  such  committee. 

(17)  The  trustees  may  employ  and  pay  all  such  agents  and 


COMBINATION    ORGANIZATION    FORMS       569 

attorneys  as  they  may  deem  necessary  in  the  management  of 
said  trust. 

(18)  Each  trustee  shall  be  entitled  to  a  salary  for  his  services 
not  exceeding  twenty-five  thousand  dollars  per  annum,  except 
the  president  of  the  board,  who  may  be  voted  a  salary  not  ex- 
ceeding thirty  thousand  dollars  per  annum,  which  salaries  shall 
be  fixed  by  said  board  of  trustees.  All  salaries  and  expenses 
connected  with  or  growing  out  of  the  trust  shah  be  paid  by  the 
trustees  from  the  trust  fund. 

(19)  The  board  of  trustees  shall  have  its  principal  office  in 
the  city  of  New  York,  unless  changed  by  vote  of  the  trustees, 
at  which  office,  or  in  some  place  of  safe  deposit  in  said  city, 
the  bonds  and  stocks  shall  be  kept.  The  trustees  shall  have 
power  to  adopt  rules  and  regulations  pertaining  to  the  meetings 
of  the  board,  the  election  of  officers,  and  the  management  of  the 
trust. 

(20)  The  trustees  shall  render  at  each  annual  meeting  a  state- 
ment of  the  affairs  of  the  trust.  If  a  termination  of  the  trust 
be  agreed  upon,  as  hereinafter  provided,  or  within  a  reasonable 
time  prior  to  its  termination  by  lapse  of  time,  the  trustees  shall 
furnish  to  the  holders  of  the  trust  certificates  a  true  and  perfect 
inventory  and  appraisement  of  all  stocks  and  other  property 
held  in  trust,  and  a  statement  of  the  financial  affairs  of  the 
various  companies  whose  stocks  are  held  in  trust. 

(21)  The  trust  shall  continue  during  the  lives  of  the  survivors 
and  survivor  of  the  trustees  in  this  agreement  named,  and  for 
twenty-one  years  thereafter;  provided,  however,  that  if  at  any 
time  after  the  expiration  of  ten  years  two-thirds  of  all  the  holders 
in  value,  or  if  after  the  expiration  of  one  year  90  per  cent  of  all 
the  holders  in  value  of  trust  certificates  shall,  at  a  meeting  of 
holders  of  trust  certificates  called  for  that  purpose,  vote  to  ter- 
minate this  trust  at  some  time  to  be  by  them  then  and  therei 
fixed,  the  said  trust  shall  terminate  at  the  date  so  fixed.  If  the 
holders  of  trust  certificates  shall  vote  to  terminate  the  trust  as 
aforesaid,  they  may,  at  the  same  meeting,  or  at  a  subsequent 
meeting  called  for  that  purpose,  decide  by  vote  of  two-thirds  in 
value  of  their  number  the  mode  in  which  the  affairs  of  the  trust 
shall  be  wound   up,  and   whether  the  trust   property  shall   be 


570  SUPPLEMENTARY    FORMS 

distributed  or  whether  part,  and  if  so,  what  part  shall  be  divided 
and  what  part  sold,  and  whether  such  sales  shall  be  public  or 
private.  The  trustees,  who  shall  continue  to  hold  their  office 
for  that  purpose,  shall  make  the  distribution  in  the  mode  directed, 
or,  if  no  mode  be  agreed  upon,  by  two-thirds  in  value  as  aforesaid, 
the  trustees  shall  make  distribution  of  the  trust  property  accord- 
ing to  law.  But  said  distribution,  however  made,  and  whether 
it  be  of  property,  or  values,  or  of  both  shall  be  just  and  equi- 
table, and  such  as  to  insure  to  each  owner  of  a  trust  certificate 
his  due  proportion  of  the  trust  property  of  the  value  thereof. 

(22)  If  the  trust  shall  be  terminated  by  the  expiration  of  the 
time  for  wliich  it  is  created,  the  distribution  of  the  trust  prop- 
erty shall  be  directed  and  made  in  the  mode  above  provided. 

(23)  This  agreement,  together  with  the  registry  of  certificates, 
book  of  accounts,  and  other  books  and  papers  connected  with 
the  businesss  of  said  trust,  shall  be  safely  kept  at  the  principal 
office  of  said  trustees. 

(Signatures). 

Supplemental    Agreement 

WHEREAS  in  and  by  agreement  dated  January  2,  1882,  and 
known  as  the  Standard  Trust  agreement,  the  parties  thereto  did 
mutually  covenant  and  agree,  inter  alia,  as  follows,  to  wit:  That 
corporations  to  be  known  as  Standard  Oil  Companies  of  various 
States  should  be  formed,  and  that  all  of  the  property,  real  and 
personal  assets,  and  business  of  each  and  all  of  the  corporations 
and  limited  partnerships  mentioned  or  embraced  in  class  first 
of  said  agreement  should  be  transferred  and  vested  in  the 
said  several  Standard  Oil  Companies;  that  all  of  the  property, 
assets,  and  business  in  or  of  each  particular  State  should  be 
transferred  to  and  vested  in  the  Standard  Oil  Company  of  that 
pnrticnlnr  State,  and  the  directors  and  managers  of  each  and  all 
of  the  several  corporations  and  associations  mentioned  in  class 
first  were  authorized  and  directed  to  sell,  assign,  transfer,  and 
convey,  and  to  make  over  to  the  Standard  Oil  Company  or  Com- 
panies of  the  proper  State  or  States,  as  soon  as  said  corporations 
were  organized  and  ready  to  receive  the  same,  all  of  the  property, 
real  and  personal,  assets  and  liusiness  of  said  corporations  or 


COMBINATION    ORGANIZATION    FORMS       571 

associations;  and  whereas  it  is  not  deemed  expedient  that  all  oi 
the  companies  and  associations  mentioned  should  transfer  their 
property  to  the  said  Standard  Oil  Companies  at  the  present  time, 
and  in  case  of  some  companies  and  associations  it  may  never  be 
deemed  expedient  that  the  said  transfer  should  be  made,  and 
said  companies  and  associations  go  out  of  existence;  and 
whereas  it  is  deemed  advisable  that  a  discretionary  power  should 
be  vested  in  the  trustees  as  to  when  such  transfer  or  transfers 
should  take  place,  if  at  all:  Now,  it  is  hereby  mutually  agreed 
between  the  parties  to  the  said  trust  agreement,  and  as  supple- 
mentary thereto,  that  the  trustees  named  in  the  said  agreem  nt 
and  their  successors  shall  have  the  power  and  authority  to  decide 
what  companies  shall  convey  their  property  as  in  said  agree- 
ment contemplated,  and  when  the  said  sales  and  transfers  shall 
take  place,  if  at  all,  and  until  said  trustees  shall  so  decide,  each 
of  said  companies  shall  remain  in  existence,  and  retain  its 
property  and  business,  and  the  trustees  shall  hold  the  stocks 
thereof  in  trust,  as  in  said  agreement  provided.  In  the  exercise 
of  said  discretion  the  trustees  shall  act  by  a  majority  of  their 
number  as  provided  in  said  trust  agreement.  All  portions  of  said 
trust  agreement  relating  to  this  subject  shall  be  considered  so 
changed  as  to  be  in  harmony  with  this  supplemental  agreement. 

In  witness  whereof,  the  said  parties  have  subscribed  this  agree- 
ment this  4th  day  of  January,  18S2. 

(Duly  signed  by  the  same  parties). 


FORM   60 
DIRECTORS'  RESOLUTION  FOR  CONSOLIDATION! 

Whereas,  It  is  the  sense  of  this  board  that  the  consohdation  of 
the  A.  Company,  the  B.  Company  and  the  C.  Company  to  form 
a  single  corporation,  and  the  consohdation  and  amalgamation  of 
their  respective  capital  stocks,  properties  and  franchises  will  be 
mutually  advantageous,  and 

Whereas,  The  holders  of  more  than  three-fourths  in  xa\ue  of 
all  the  capital  stock  of  each  of  said  companies  have  consented  in 

1  From  Wood,  Modem  Business   Corporations. 


572  SUPPLEMENTARY    FORMS 

writing  to  a  consolidation  of  the  said  A.  Company,  B.  Company 
and  C.  Company  upon  the  terms  following,  to  wit: 

First.  That  said  consolidation  shall  take  place  at  once,  and 
the  consolidated  corporation  shall  continue  in  existence  for  fifty 
years. 

Second.  That  the  consolidated  corporation  shall  bear  the 
name  of  the  A.  Company. 

Third.  That  the  consolidated  corporation  shall  take  over  and 
become  the  owner  of  all  the  lands,  properties,  franchises  and 
assets  of  every  description  belonging  to  each  of  said  constituent 
companies;  shall  assume,  become  liable  for,  pay  and  cUscharge, 
all  valid  debts,  liabilities  and  obligations  of  every  kind,  character 
and  description,  heretofore  incurred  or  entered  into  by  either  and 
all  of  said  constituent  companies;  shall  hold  said  property  and 
franchises  subject  to  all  the  valid  conch tions,  liens  and  claims  to 
which  the  same  were  and  are  subject  in  the  hands  of  the  several 
constituent  companies;  and  shall  assume,  undertake  and  per- 
form all  contracts,  agreements  and  undertakings  to  which  any 
and  all  of  said  constituent  companies  are  lawfully  bound  to  the 
same  extent  in  like  manner  as  such  constituent  company  or 
companies  are  bound  to  keep  and  perform  the  same. 

Fourth.  That  the  objects  and  purposes  of  the  consolidated 
company  shall  be  made  to  embrace  the  objects  and  purposes  of 
all  the  three  constituent  corporations. 

Fifth.  That  the  consolidated  company  shall  have  a  board  of 
directors  equal  in  number  to  the  combined  boards  of  the  three 
constituent  companies,  and  its  directors  for  the  first  year  shall 
be  all  the  directors  of  all  of  said  companies. 

Sixth.  That  its  principal  place  of  business  shall  be  that  of  the 
A.  Company. 

Seventh.  That  the  capital  stock  of  said  consolidated  com- 
yiany  shall  consist  of  one  hundred  thousand  (100,000)  shares  of 
one  hundred  dollars  ($100)  each,  and  shall  be  issued  to  share- 
holders in  the  constituent  companies  (upon  surrender  of  their 
shares  of  stock  therein)  in  the  proportion  that  such  shares  held 
by  them  respectively  shall  bear  to  the  combined  capital  stocks  of 
all  the  said  constituent  companies. 

Be  it  resolved,  that  the  propositions  and  conditions  above  re- 
cited are  hereby  accepted  and  adopted  by  the  board  of  direc- 
tors of  the Company. 


COMBINATION    ORGANIZATION    FORMS       573 

FORM   61 

STOCKHOLDERS'    RESOLUTION    AUTHORIZING 
CONSOLIDATION 

Whereas,  A  consolidation  of  the  A.  Company,  the  B.  Com- 
pany and  the  C.  Company  under  the  name  of  the  A  Company, 
has  been  proposed  on  terms  and  conditions  set  forth  in  an  agree- 
ment entered  into  on  the day  of ,  19. ... ,  be- 
tween the  Directors  of  said  corporations  and  heretofore  sub- 
mitted to  the  stockholders  of  this  Company;  and 

Whereas,  Said  proposed  consolidation  meets  wdth  the  ap- 
proval of  the  stockholders  of  this  Corporation: 

Now,  Therefore,  Be  It  Resolved,  That  the  Board  of  Directors 
of  this  Company  be  and  hereby  is  fully  authorized,  empowered, 
and  instructed  to  take  all  such  steps  as  may  be  necessary  or 
desirable  to  carry  said  consolidation  into  effect  in  accordance 
with  the  terms  of  said  agreement  between  the  Directors  of  the 
three  aforementioned  corporations. 


FORM  62 
CHARTER  OF  AN  INDUSTRIAL  CONTROL  COMPANY 

AMENDED    CERTIFICATE    OF    INCORPORATION 
OF  UNITED  STATES  STEEL  CORPORATION 

We,  the  undersigned,  in  order  to  form  a  corporation  for  the 
purposes  hereinafter  stated,  under  and  pursuant  to  the  pro- 
visions of  the  Act  of  the  Legislature  of  the  State  of  New  Jersey, 
entitled  "An  Act  concerning  corporations  (Revision  of  1896)," 
and  the  acts  amendatory  thereof  and  supplemental  thereto,  do 
hereby  certify  as  follows: 

I.  The  name  of  the  corporation  is 

United  States  Steel  Corporation 

IT.  The  location  of  its  principal  office  in  the  State  of  New 
Jersey   is  at  No.  51   Newark  Street,  in  the  City  of  Hoboken, 


574  SUPPLEMENTARY    F0R:\IS 

County  of  Hudson.  The  name  of  the  agent  therein  and  in  charge 
thereof,  upon  whom  process  against  the  corporation  may  be 
served,  is  Hudson  Trust  Company.  Said  office  is  to  be  the  regis- 
tered office  of  said  corporation. 

in.  The  objects  for  which  the  corporation  is  formed  are: 

To  manufacture  iron,  steel,  manganese,  coke,  copper,  lumber 
and  other  materials,  and  all  or  any  articles  consisting,  or  partly 
consisting,  of  iron,  steel,  copper,  wood  or  other  materials,  and 
all  or  any  products  thereof. 

To  acquire,  own,  lease,  occupy,  use  or  develop  any  lands  con- 
taining coal  or  iron,  manganese,  stone  or  other  ores,  or  oil,  and 
any  wood  lands,  or  other  lands  for  any  purpose  of  the  Company. 

To  mine,  or  otherwise  to  extract  or  remove,  coal,  ores,  stone, 
and  other  minerals  and  timber  from  any  lands  owned,  acquired, 
leased,  or  occupied  by  the  Company,  or  from  any  other  lands. 

To  buy  and  sell,  or  otherwise  to  deal  or  to  traffic  in,  iron,  steel, 
manganese,  copper,  stone,  ores,  coal,  coke,  wood,  lumber  and 
other  materials,  and  any  of  the  products  thereof,  and  any  articles 
consisting,  or  partly  consisting  thereof. 

To  construct  bridges,  buildings,  machinery,  ships,  boats, 
engines,  cars  and  other  equipment,  railroads,  docks,  slips,  eleva- 
tors, water  works,  gas  works  and  electric  works,  viaducts, 
aqueducts,  canals  and  other  water-ways,  and  any  other  means 
of  transportation,  and  to  sell  the  same,  or  otherwise  to  dispose 
thereof,  or  to  maintain  and  operate  the  same,  except  that  the 
Company  shall  not  maintain  or  operate  any  railroad  or  canal  in 
the  State  of  New  Jersey. 

To  apply  for,  obtain,  register,  purchase,  lease,  or  otherwise 
to  acquire,  and  to  hold,  use,  own,  operate  and  introduce,  and  to 
sell,  assign,  or  otherwise  to  dispose  of,  any  trade-marks,  trade- 
names, patents,  inventions,  improvements  and  processes  used  in 
connection  Vv'ith,  or  secured  under  letters  patent  of  the  United 
States,  or  elsewhere,  or  otherwise;  and  to  use,  exercise,  develop, 
grant  licenses  in  respect  of,  or  otherwise  to  turn  to  account  any 
such  trade-marks,  patents,  licenses,  processes,  and  the  like,  or 
any  such  property  or  rights. 

To  engage  in  any  other  manufacturing,  mining,  construction 
or  transportation  business  of  any  kind  or  character  whatsoever, 


COMBINATION    ORGANIZATION    FORMS       575 

and  to  that  end  to  ajquire,  hold,  own  and  dispose  of  any  and 
all  property,  assets,  stocks,  bonds  and  rights  of  any  and  every 
kind;  but  not  to  engage  in  any  business  hereunder  which  shall 
require  the  exercise  of  the  right  of  eminent  domain  within  the 
State  of  New  Jersey. 

To  acquire  by  purchase,  subscription  or  otherwise,  and  to 
hold  or  to  dispose  of,  stocks,  bonds  or  any  other  obhgations  of 
any  corporation  formed  for,  or  then  or  theretofore  engaged  in 
or  pursuing,  any  one  or  more  of  the  kinds  of  business,  purposes, 
objects  or  operations  above  indicated,  or  owning  or  holding  any 
property  of  any  kind  herein  mentioned;  or  of  any  corporation 
owning  or  holding  the  stocks  or  the  obligations  of  any  such 
corporation. 

To  hold  for  investment,  or  otherwise  to  use,  sell  or  dispose  of, 
any  stock,  bonds,  or  other  obligations  of  any  such  other  cor- 
poration; to  aid  in  any  manner  any  corporation  whose  stock, 
bonds  or  other  obligations  are  held  or  are  in  any  manner  guaran- 
teed by  the  Company,  and  to  do  any  other  acts  or  things  for 
the  preservation,  protection,  improvement  or  enhancement  of 
the  value  of  any  such  stock,  bonds  or  other  obligations,  or  to  do 
any  acts  or  things  designated  for  any  such  purpose;  and,  while 
owner  of  any  such  stock,  bonds  or  other  obligation,  to  exercise  all 
the  rights,  powers  and  privileges  of  ownership  thereof,  and  to 
exercise  any  and  all  voting  power  thereon. 

The  business  or  purpose  of  the  Company  is  from  time  to 
time  to  do  any  one  or  more  of  the  acts  and  things  herein  set 
forth;  and  it  may  conduct  its  business  in  other  States  and  in  the 
Territories  and  in  foreign  countries,  and  may  have  one  office  or 
more  than  one  office,  and  keep  the  books  of  the  Company  out- 
side of  the  State  of  New  Jersey,  except  as  otherwise  may  be 
provided  by  law;  and  may  hold,  purchase,  mortgage  and  convey 
real  and  personal  property  either  in  or  out  of  the  State  of  New 
Jersey. 

Without  in  any  particular  limiting  any  of  the  objects  and 
powers  of  the  corporation,  it  is  hereby  expressly  declared  and 
provided  that  the  corporation  shall  have  power  to  issue  bonds 
and  other  obligations,  in  payment  for  property  purchased  or  ac- 
quired by  it,  or  for  any  object  in  or  about  its  business;   to 


576  SUPPLEMENTARY    FORMS 

mortgage  or  pledge  any  stocks,  bonds  or  other  obligations,  or 
any  property  which  may  be  acquired  by  it,  to  secure  any  bonds 
or  other  obligations  by  it  issued  or  incurred;  to  guarantee  any 
dividends  or  bonds  or  contracts  or  other  obligations;  to  make  and 
perform  contracts  of  any  kind  and  description;  and  in  carrying 
on  its  business,  or  for  the  purpose  of  attaining  or  furthering  any 
of  its  objects,  to  do  any  and  all  other  acts  and  things,  and  to 
exercise  any  and  all  other  powers  which  a  copartnership  or 
natural  person  could  do  and  exercise,  and  which  now  or  here- 
after may  be  authorized  by  law. 

IV.  The  total  authorized  capital  stock  of  the  corporation  is 
eleven  hundred  milhon  dollars  ($1,100,000,000),  divided  into 
eleven  million  shares  of  the  par  value  of  one  hundred  dollars 
each.  Of  such  total  authorized  capital  stock,  five  million  five 
hundred  thousand  shares,  amounting  to  five  hundred  and  fifty 
million  dollars,  shall  be  preferred  stock,  and  five  million  five 
hundred  thousand  shares,  amounting  to  five  hundred  and  fifty 
million  dollars,  shall  be  common  stock. 

From  time  to  time,  the  preferred  stock  and  the  common  stock 
may  be  increased  according  to  law,  and  may  be  issued  in  such 
amounts  and  proportions  as  shall  be  determined  by  the  board 
of  directors,  and  as  may  be  permitted  by  law. 

The  holders  of  the  preferred  stock  shall  be  entitled  to  receive 
when  and  as  declared,  from  the  surplus  or  net  profits  of  the  cor- 
poration, yearly  dividends  at  the  rate  of  seven  per  centum  per 
annum,  and  no  more,  payable  quarterly  on  dates  to  be  fixed  by 
the  by-laws.  The  dividends  on  the  preferred  stock  shall  be  cumu- 
lative, and  shall  be  payable  before  any  dividend  on  the  common 
stock  shall  be  paid  or  set  apart:  so  that,  if  any  year  dividends 
amounting  to  seven  per  cent  shall  not  have  been  paid  thereon, 
the  deficiency  shall  be  payable  before  any  dividends  shall  be 
paid  upon  or  set  apart  for  the  common  stock. 

Whenever  all  cumulative  dividends  on  the  preferred  stock  for 
all  previous  years  shall  have  been  declared  and  shall  have  be- 
come payable,  and  the  accrued  quarterly  instalments  for  the 
current  year  shall  have  boon  declared,  and  the  company  shall 
have  paid  such  cumulative  diviflonds  for  iirovious  years  and 
such  accrued  quarterly  instalments,  or  shall  have  set  aside  from 


COMBINATION    ORGANIZATION    FORMS       577 

its  surplus  or  net  profits  a  sum  sufficient  for  the  payment  thereof, 
the  Board  of  Directors  may  declare  dividends  on  the  common 
stock,  payable  then  or  thereafter,  out  of  any  remaining  surplus 
or  net  profits. 

In  the  event  of  any  liquidation  or  dissolution  or  winding  up 
(whether  voluntary  or  involuntary)  of  the  corporation,  the 
holders  of  the  preferred  stock  shall  be  entitled  to  be  paid  in  full 
both  the  par  amount  of  their  shares,  and  the  unpaid  dividends 
accrued  thereon  before  any  amount  shall  be  paid  to  the  holders 
of  the  common  stock;  and  after  the  payment  to  the  holders  of 
the  preferred  stock  of  its  par  value,  and  the  unpaid  accrued  divi- 
dends thereon,  the  remaining  assets  and  funds  shall  be  divided 
and  paid  to  the  holders  of  the  common  stock  according  to  their 
respective  shares. 

V.  The  names  and  post-office  addresses  of  the  incorporators, 
and  the  number  of  shares  of  stock  for  which  severally  and  respec- 
tively we  do  hereby  subscribe  (the  aggregate  of  our  said  subscrip- 
tions, being  three  thousand  dollars,  is  the  amount  of  capital  stock 
with  which  the  corporation  will  commence  business,  are  as 
follows : 


Post  office  address 

Number  of  Shares 

Name 

Preferred 
stock 

Common 

stock 

Charles  C.  Cluff 

William  J.  Curtis 

Charles  MacVeagh. .  .  . 

51  Newark  Street,  Ho- 

boken,  New  Jersey 

Ditto 

Ditto 

5 
5 
5 

5 
5 
5 

VI.  The  duration  of  the  corporation  shall  be  perpetual. 

VII.  The  number  of  directors  of  the  Company  shall  be  fixed 
from  time  to  time  by  the  by-laws;  but  the  number  if  fixed  at 
more  than  three,  shall  be  some  multiple  of  three.  The  directors 
shall  be  classified  with  respect  to  the  time  for  which  they  shall 
severally  hold  office  by  dividing  them  into  three  classes,  each 
consisting  of  one-third  of  the  whole  number  of  the  board  of  direc- 
tors. The  directors  of  the  first  class  shall  be  elected  for  a  term 
of  one  year;  the  directors  of  the  second  class  for  a  term  of  two 


578  SUPPLEMENTARY    FORMS 

years;  and  the  directors  of  the  third  class  for  a  term  of  three 
years;  and  at  each  annual  election  the  successors  to  the  class  of 
directors  whose  terms  shall  expire  in  that  year  shall  be  elected 
to  hold  office  for  the  term  of  three  years,  so  that  the  term  of  office 
of  one  class  of  directors  shall  expire  in  each  year. 

The  number  of  the  directors  may  be  increased  as  may  be  pro- 
vided in  the  by-laws.  In  case  of  any  increase  of  the  number  of 
the  directors  the  additional  directors  shall  be  elected  as  may  be 
provided  in  the  by-laws,  by  the  Directors  or  by  the  stockholders 
at  an  annual  or  special  meeting  and  one-third  of  their  number 
shall  be  elected  for  the  then  unexpired  portion  of  the  term  of 
the  directors  of  the  first  class,  one-third  of  their  number  for  the 
unexpired  portion  of  the  term  of  the  directors  of  the  second 
class,  and  one-third  of  their  number  for  the  unexpired  portion 
of  the  term  of  the  directors  of  the  third  class,  so  that  each  class 
of  directors  shall  be  increased  equally. 

In  case  of  any  vacancy  in  any  class  of  directors  through  death, 
resignation,  disquahfication  or  other  cause,  the  remaining  direc- 
tors, by  affirmative  vote  of  a  majority  of  the  Board  of  Directors, 
may  elect  a  successor  to  hold  office  for  the  unexpired  portion  of 
the  term  of  the  director  whose  place  shall  be  vacant,  and  until 
the  election  of  a  successor. 

The  Board  of  Directors  shall  have  power  to  hold  their  meet- 
ings outside  of  the  State  of  New  Jersey  at  such  places  as  from 
time  to  time  may  be  designated  by  the  by-laws  or  by  resolution 
of  the  Board.  The  by-laws  may  prescribe  the  number  of  direc- 
tors necessary  to  constitute  a  quorum  of  the  Board  of  Directors, 
which  number  may  be  less  than  a  majority  of  the  whole  number 
of  the  directors. 

Unless  authorized  by  votes  given  in  person  or  by  proxy  by 
stockholders  holding  at  least  two-thirds  of  the  capital  stock  of 
the  corporation,  which  is  represented  and  voted  upon  in  person 
or  by  proxy  at  a  meeting  specially  called  for  that  purpose  or  at 
an  annual  meeting,  the  Board  of  Directors  shall  not  mortgage  or 
pledge  any  of  its  real  property,  or  any  shares  of  the  capital 
stock  of  any  other  corporation;  but  this  prohibition  shall  not  be 
construed  to  apply  to  the  execution  of  any  purchase-money 
mortgage  or  any  other  purchase-money  lien.  As  authorized  by 
the  Act  of  the  Legislature  of  the  State  of  New  Jersey  passed 


COMBINATION    ORGANIZATION    FORMS      579 

March  22,  1901,  amending  the  17th  section  of  the  Act  Concerning 
Corporations  (Revision  of  1896),  any  action  which  theretofore 
required  the  consent  of  the  holders  of  two-thirds  of  the  stock  at 
any  meeting  after  notice  to  them  given,  or  required  their  consent 
in  writing  to  be  filed,  may  be  taken  upon  the  consent 
of,  and  the  consent  given  and  filed  by  the  holders  of  two-thirds 
of  the  stock  of  each  class  represented  at  such  meeting  in  per- 
son or  by  proxy. 

Any  officer  elected  or  appointed  by  the  Board  of  Directors 
may  be  removed  at  any  time  by  the  affirmative  vote  of  a  majority 
of  the  whole  Board  of  Directors.  Any  other  officer  or  employee 
of  the  Company  may  be  removed  at  any  time  by  vote  of  the 
Board  of  Directors,  or  by  any  committee  or  superior  officer  upon 
whom  such  power  of  removal  may  be  conferred  by  the  by-laws 
or  by  vote  of  the  Board  of  Directors. 

The  Board  of  Directors,  by  the  affirmative  vote  of  a  majority 
of  the  whole  board,  may  appoint  from  the  directors  an  executive 
committee,  of  which  a  majority  shall  constitute  a  quorum;  and 
to  such  extent  as  shall  be  provided  in  the  by-laws,  such  committee 
shall  have  and  may  exercise  all  or  any  of  the  powers  of  the 
Board  of  Directors,  including  power  to  cause  the  seal  of  the 
corporation  to  be  affixed  to  all  papers  that  may  require  it. 

The  Board  of  Directors,  by  the  affirmative  vote  of  a  majority 
of  the  whole  board,  may  appoint  any  other  Standing  Committees, 
and  such  Standing  Committees  shall  have  and  may  exercise  such 
powers  as  shall  be  conferred  or  authorized  by  the  by-laws. 

The  Board  of  Directors  may  appoint  not  only  other  officers 
of  the  Company,  but  also  one  or  more  vice-presidents,  one  or 
more  assistant  treasurers  and  one  or  more  assistant  secretaries; 
and,  to  the  extent  provided  in  the  by-laws,  the  persons  so  ap- 
pointed respectively  shall  have  and  may  exercise  all  the  powers 
of  the  president,  of  the  treasurer,  and  of  the  secretary, 
respectively. 

The  Board  of  Directors  shall  have  power  from  time  to  time 
to  fix  and  to  determine  and  to  vary  the  amount  of  the  working 
capital  of  the  Company;  and  to  direct  and  determine  the  use 
and  disposition  of  any  surplus  or  net  profits  over  and  above 
the  capital  stock  paid  in;  and  in  its  discretion  the  Board  of 
Directors  may  use  and  apply  any  such  surplus  or  accumulated 


580  SUPPLEMENTARY    FORMS 

profits  in  purchasing  or  acquiring  its  bonds  or  other  obhgations, 
or  shares  of  its  own  capital  stock,  to  such  extent  and  in  such  marj- 
ner  and  upon  such  terms  as  the  Board  of  Directors  shall  deem  ex- 
pedient; but  shares  of  such  capital  stock  so  purchased  or  ac- 
quired may  be  resold,  unless  such  shares  shall  have  been  retired 
for  the  purpose  of  decreasing  the  Company's  capital  stock  as  pro- 
vided by  law. 

The  Board  of  Directors  from  time  to  time  shall  determine 
whether  and  to  what  extent,  and  at  what  times  and  places,  and 
under  what  conditions  and  regulations,  the  accounts  and  books  of 
the  corporation,  or  any  of  them,  shall  be  open  to  the  inspection 
of  the  Stockholders,  and  no  Stockholder  shall  have  any  right  to 
inspect  any  account  or  book  or  document  of  the  corporation, 
except  as  conferred  by  Statute  or  authorized  by  the  Board  of 
Directors,  or  by  a  resolution  of  the  Stockholders. 

Subject  always  to  by-laws  made  by  the  Stockholders,  the 
Board  of  Directors  may  make  by-laws,  and,  from  time  to  time, 
may  alter,  amend  or  repeal  any  by-laws;  but  any  by-laws  made 
by  the  Board  of  Directors  may  be  altered  or  repealed  by  the 
Stockholders  at  any  annual  meeting,  or  at  any  special  meeting, 
provided  notice  of  such  proposed  alteration  or  repeal  be  included 
in  the  notice  of  the  meeting. 

In  witness  whereof,  we  have  hereunto  set  our  hands  and  seals 
the  23rd  day  of  February,  1901. 

Charles  C.  Cluff 
William  J.  Curtis 
Charles  MacVeagh 
Signed,  sealed  and  delivered  ) 

in  the  presence  of  ) 

Francis  Lynde  Stetson 
Victor  Morawetz. 

State  of  New  Jersey,     \  ^^. 
County  of  Hudson,         ) 

Be  it  remembered  that  on  this  23rd  day  of  February,  1901, 
before  the  tmdersigned,  personally  appeared  Charles  C.  Cluff, 
William  J.  Curtis  and  Charles  MacVeagh,  who,  I  am  satisfied, 
are  the  persons  named  in  and  who  executed  the  foregoing  cer- 


COMBINATION    ORGANIZATION    FORMS       581 

tificate;  and  I  having  first  made  known  to  them,  and  to  each  of 
them,  the  contents  thereof,  they  did  each  acknowledge  that  they 
signed,  sealed  and  delivered  the  same  as  their  voluntary  act  and 
deed. 

Geo    Holmes 
Master  in  Chancery  of  New  Jersey. 
lOct.  Internal  Revenue  Stamp  Cancelled. 

Endorsed  "  Received  in  the  Hudson  Co ,  N.  J.,  Clerk's  Office, 
February    25th    a.d.    1901,    and    Recorded    in    Clerk's    Record 

No on  page 

Maurice  J.  Stack 
Clerk. 
Endorsed  "Filed  Feb.  25,  1901. 

George  Wurts 
Secretary  of  State. 


FORM   63 

CHARTER   OF   A   PURE   SECUR     lES-HOLDING 
CORPORATION 

Certificate  of  Incorporation  op  Northern 
Securities  Company  ^ 

State  of  New  Jersey,  ss  : 

We,  the  undersigned,  in  order  to  form  a  corporation  for  the 
purposes  hereinafter  stated,  under  and  pursuant  to  the  provisions 
of  the  act  of  the  legislature  of  the  State  of  New  Jersey  entitled 
"An  act  concerning  corporations"  (revision  of  1896),  and  the 
acts  amendatory  thereof  and  supplemental  thereto,  do  hereby 
certify  as  follows: 

First.  The  name  of  the  corporation  is  Northern  Securities 
Company. 

Second.  The  location  of  its  principal  office  in  the  State  of 
New  Jersey  is  at  No.  51  Newark  Street,  in  the  city  of  Hoboken, 
county  of  Hudson.    The  name  of  the  agent  therein,  and  in  charge 

1  Taken  from  Northern  Securities  Co.  v.  United  States,  193  U.  S 
197,  pp.  216-221. 


582  SUPPLEMENTARY    FORMS 

thereof,   upon  whom   process   against   the   corporation   may  be 
served,  is   Hudson  Trust  Company.     Such  office  is  to   be  the 
registered  office  of  the  corporation. 
Third.    The  objects  for  which  the  corporation  is  formed  are: 

(1)  To  acquire  by  purchase,  subscription,  or  otherwise,  and 
to  hold  as  investment,  any  bonds  of  other  securities  or  evidences 
of  indebtedness,  or  any  shares  of  capital  stock  created  or  issued 
by  any  other  corporation  or  corporations,  association  or  associa- 
tions, of  the  State  of  New  Jersey,  or  of  any  other  State,  Terri- 
tory, or  country. 

(2)  To  purchase,  hold,  sell,  assign,  transfer,  mortgage,  pledge, 
or  otherwise  dispose  of  any  bonds  or  other  securities  or  evidences 
of  indebtedness  created  or  issued  by  any  other  corporation  or 
corporations,  association  or  associations,  of  the  State  of  New 
Jersey,  or  of  any  other  State.  Territory,  or  country,  and  while 
owner  thereof  to  exercise  all  the  rights,  powers,  and  privileges  of 
ownership. 

(3)  To  purchase,  hold,  sell,  assign,  transfer,  mortgage,  pledge, 
or  otherwise  cUspose  of  shares  of  the  capital  stock  of  any  other 
corporation  or  corporations,  association  or  associations,  of  the 
State  of  New  Jersey,  or  of  any  other  State,  Territory,  or  country, 
and  while  owner  of  such  stock  to  exercise  all  the  rights,  powers, 
and  privileges  of  ownership,  including  the  right  to  vote  thereon. 

(4)  To  aid  in  any  manner  any  corporation  or  association  of 
which  any  bonds  or  other  securities  or  evidences  of  indebtedness 
or  stock  are  held  by  the  corporation,  and  to  do  any  acts  or 
things  designed  to  protect,  preserve,  improve,  or  enhance  the 
value  of  any  such  bonds  or  other  securities  or  evidences  of  in- 
debtedness or  stock. 

(5)  To  acquire,  own  and  hold  such  real  and  personal  property 
as  may  be  necessary  or  convenient  for  the  transaction  of  its 
business. 

The  business  or  purpose  of  the  corporation  is  from  time  to  time 
to  do  any  one  or  more  of  the  acts  and  things  herein  set  forth. 

The  corporation  shall  have  power  to  conduct  its  business  in 
other  States  and  in  foreign  countries,  and  to  have  one  or  more 
offices  out  of  this  State,  and  to  hold,  purchase,  mortgage,  and 
convey  real  personal  property  out  of  this  State. 

Fourth.    The  total  authorized  capital  stock  of  the  corporation 


COMBINATION    ORGANIZATION    FORMS       583 

is  four  hundred  million  dollars  ($400,000,000),  divided  into  four 
million  (4,000,000)  shares  ot  the  par  value  of  one  hundred  dollars 
($100)  each.  The  amount  ot  the  capital  stock  with  which  the 
corporation  will  commence  business  is  thirty  thousand  dollars. 

Fifth.  The  names  and  post-ofhce  addresses  of  the  incorporators, 
and  the  number  of  shares  of  stock  subscribed  for  by  each  (the 
aggregate  of  such  subscriptions  being  the  amount  of  capital  stock 
with  which  the  company  will  commence  business),  are  as 
follows : 

Name  and  post-office  address  Number  of  shares 

George  F.  Baker,  Jr.,  258  Madison  avenue,  New  York,  N.  Y.  100 
Abram  M.  Hyatt,  214  Allen  avenue,  Allenliurst,  N.  Y.  100 

Richard  Trimble,  53  East  Twenty-fifth  street,  New  York,  N.  Y.    100 

Sixth.    The  duration  of  the  corporation  shall  be  perpetual. 

Seventh.  The  number  of  directors  of  the  corporation  shall  be 
fixed  from  time  to  time  by  the  by-laws;  but  the  number,  if  fixed 
at  more  than  three,  shall  be  some  multiple  of  three.  The  direc- 
tors shall  be  classified  with  respect  to  the  time  for  which  they  shall 
severally  hold  office  by  dividing  them  into  three  classes,  each 
consisting  of  one-third  of  the  whole  number  of  the  board  of 
directors.  The  directors  of  the  first  class  shall  be  elected  for  a 
term  of  one  year,  the  directors  of  the  second  class  for  a  tenm 
of  two  years,  and  the  directors  of  the  third  class  for  a  term  of 
three  years;  and  at  each  annual  election  the  successors  to  the 
class  of  directors  whose  term  shall  expire  in  that  year  shall  be 
elected  to  hold  office  for  the  term  of  three  years,  so  that  the 
term  of  office  of  one  class  of  directors  shall  expire  in  each  year. 

In  case  of  any  increase  of  the  number  of  the  directors  the  addi- 
tional directors  shall  be  elected  as  may  be  provided  in  the  by- 
laws, by  the  director  or  by  the  stockholders  at  an  annual  or 
special  meeting,  and  one-third  of  their  number  shall  be  elected 
for  the  then  unexpired  portion  of  the  term  of  the  directors  of 
the  first  class,  one  third  of  their  number  for  the  unexpired  por- 
tion of  the  term  of  the  directors  of  the  second  class,  and  one- 
third  of  their  number  for  the  unexpired  portion  of  the  term  of  the 
directors  of  the  third  class,  so  that  each  class  of  directors  shaU 
be  increased  equally. 


584  SUPPLEMENTARY    FORMS 

In  case  of  any  vacancy  in  any  class  of  directors  through  death, 
resignation,  disqualification,  or  other  cause,  the  remaining  direc- 
tors, by  affirmative  vote  of  a  majority  of  the  board  of  directors, 
may  elect  a  successor  to  hold  office  for  the  unexpired  portion  of 
the  term  of  the  director  whose  place  shall  be  vacant,  and  until 
the  election  of  a  successor. 

The  board  of  directors  shall  have  power  to  hold  their  meet- 
ings outside  the  State  of  New  Jersey  at  such  places  as  from  time 
to  time  may  be  designated  by  the  by-laws,  or  by  resolution  of  the 
board.  The  by-laws  may  prescribe  the  number  of  directors 
necessary  to  constitute  a  quorum  of  the  board  of  directors,  which 
number  may  be  less  than  a  majority  of  the  whole  number  of  the 
directors. 

As  authorized  by  the  act  of  the  legislature  of  the  State  of  New 
Jersey  passed  March  22,  1901,  amending  the  seventeenth  section 
of  the  act  concerning  corporations  (revision  of  1896),  any  action 
which  theretofore  required  the  consent  of  the  holders  of  two- 
thirds  of  the  stock  at  any  meeting  after  notice  to  them  given,  or 
required  their  consent  in  writing  to  be  filed,  may  be  taken  upon 
the  consent  of,  and  the  consent  given  and  filed  by,  the  holders  of 
two-thirds  of  the  stock  of  each  class  represented  at  such  meeting 
in  person  or  by  proxy. 

Any  officer  elected  or  appointed  by  the  board  of  directors  may 
be  removed  at  any  time  by  the  affirmative  vote  of  a  majority  of 
the  whole  board  of  directors.  Any  other  officer  or  employee  of 
the  corporation  may  be  removed  at  any  time  by  vote  of  the 
board  of  directors,  or  by  any  committee  or  superior  officer  upon 
whom  such  power  of  removal  may  be  conferred  by  the  by-laws  or 
by  vote  of  the  board  of  directors. 

The  board  of  directors,  by  the  affirmative  vote  of  a  majority 
of  the  whole  board,  may  ap])oint  from  the  directors  an  executive 
committee,  of  which  a  majority  shall  constitute  a  quorum,  and 
to  such  extent  as  shall  be  provided  in  the  by-laws  such  committee 
shall  have  and  may  exercise  all  or  any  of  the  powers  of  the  board 
of  directors,  including  power  to  cause  the  seal  of  the  corporation  to 
be  affixed  to  all  papers  that  may  require  it. 

The  board  of  directors  may  appoint  one  or  more  vice-presi- 
dents, one  or  more  assistant  treasurers,  and  one  or  more  assistant 
secretaries,  and,  to  the  extent  provided  in  the  by-laws,  the  persons 


COMBINATION    ORGANIZATION    FORMS      585 

so  appointed,  respectively,  shall  have  and  may  exercise  all  the 
powers  of  the  president,  of  the  treasurer,  and  of  the  secretary 
respectively. 

The  board  of  directors  shall  have  power  from  time  to  time  to 
fix  and  determine  and  to  vary  the  amount  of  the  working  capital 
of  the  corporation;  to  determine  whether  any,  and  if  any,  what 
part  of  any  accumulated  profits  shall  be  declared  in  dividends 
and  paid  to  the  stockholders;  to  determine  the  time  or  times  for 
the  declaration  and  payment  of  dividends,  and  to  direct  and  to 
determine  the  use  and  disposition  of  any  surplus  or  net  profits 
over  and  above  the  capital  stock  paid  in;  and  in  its  discretion 
the  board  of  directors  may  use  and  apply  any  such  surplus  or 
accumulated  profits  in  purchasing  or  acquiring  its  bonds  or  other 
obligations,  or  shares  of  the  capital  stock  of  the  corporation  to 
such  extent  and  in  such  manner  and  upon  such  terms  as  the  board 
of  directors  shall  deem  expedient ;  but  shares  of  such  capital  stock 
so  purchased  or  acquired  may  be  resold,  unless  such  shares 
shall  have  been  retired  for  the  purpose  of  decreasing  the  capital 
stock  of  the  corporation  to  the  extent  authorized  by  law. 

The  board  of  directors,  from  time  to  time  shall  determine 
whether  and  to  what  extent,  and  at  what  times  and  places  and 
under  what  conditions  and  regulations,  the  accounts  and  books 
of  the  corporation,  or  any  of  them,  shall  be  open  to  the  inspec- 
tion of  the  stockholders,  and  no  stockholders  shall  have  any  right 
to  inspect  any  account  or  book  or  document  of  the  corporation 
except  as  conferred  by  statute  of  the  State  of  New  Jersey,  or 
authorized  by  the  board  of  directors  or  by  a  resolution  of  the 
stockholders. 

The  board  of  directors  may  make  by-laws,  and  from  time  to 
time  may  alter,  amend,  or  repeal  any  by-laws;  but  any  by-laws 
made  by  the  board  of  chrectors  may  be  altered  or  repealed  by  the 
stockholders  at  any  annual  meeting  or  at  any  special  meeting, 
provided  notice  of  such  proposed  alteration  or  repeal  be  included 
in  the  notice  of  the  meeting. 

In  witness  whereof  we  have  hereunto  set  our  hands  and  seals 
the  12th  day  of  November,  1901. 

Signed,  sealed  and  acknowledged  by  Geo.  F.  Baker,  Jr.,  Abram 
M.  Hyatt  and  Richard  Trimble. 


586  SUPPLEMENTARY    FORMS 


D.    SPECIMENS  OF     REGULATORY  LAWS 

FORM   64 
SHERMAN  ANTI-TRUST  ACT 

An  act  to  protect  trade  and  commerce  against  unlawful  re- 
straints and  monopolies,  approved  July  2,  1890.  26  Stat,  at 
L.  209. 

Section  1.  Every  contract,  combination  in  the  form  of  trust 
or  otherwise,  or  conspiracy,  in  restraint  of  trade  or  commerce 
among  the  several  states,  or  with  foreign  nations,  is  hereby  de- 
clared to  be  illegal.  Every  person  who  shall  make  any  such  con- 
tract or  engage  in  any  such  combination  or  conspiracy  shall 
be  deemed  guilty  of  a  misdemeanor,  and,  on  conviction  thereof, 
shall  be  punished  by  fine  not  exceeding  five  thousand  dollars, 
or  by  imprisonment  not  exceeding  one  year,  or  by  both  said 
punishments,  in  the  discretion  of  the  court. 

Section  2.  Every  person  who  shall  monopolize,  or  attempt 
to  monopolize,  or  combine  or  consj^ire  with  any  other  person 
or  persons,  to  monopolize  any  part  of  the  trade  or  commerce 
among  the  several  states,  or  with  foreign  nations,  shall  be  deemed 
guilty  of  a  misdemeanor,  and,  on  conviction  thereof,  shall  be 
punished  by  fine  not  exceeding  five  thousand  dollars,  or  by  im- 
prisonment not  exceeding  one  year,  or  by  both  said  punishments, 
in  the  discretion  of  the  court. 

Section  3.  Every  contract,  combination  in  the  form  of  trust 
or  otherwise,  or  conspiracy,  in  restraint  of  trade  or  commerce 
in  any  territory  of  the  United  States  or  of  the  District  of  Co- 
lumbia, or  in  restraint  .of  trade  or  commerce  between  any  such 
territory  and  another,  or  between  any  such  territory  or  terri- 
tories and  any  state  or  states  or  the  District  of  Columbia,  or 
with  foreign  nations,  or  between  the  District  of  Columbia  and 
any  state  or  states  or  foreign  nations,  is  hereby  declared  il- 
legal. Every  person  who  shall  make  any  such  contract  or  en- 
gage in  any  such  combination  or  conspiracy  shall  be  deemed 
guilty  of  a  misdemeanor,  and,  on  conviction  thereof,  shall  be 
punished  by  fine  not  exceeding  five  thousand  dollars,  or  by  im- 


SPECIMENS    OF    REGULATORY    LAWS       587 

prisonment  not  exceeding  one  year,  or  by  both  said  punishments, 
in  the  discretion  of  the  court. 

Section  4.  The  several  circuit  courts  of  the  United  States 
are  hereby  invested  with  jurisdiction  to  prevent  and  restrain 
violations  of  this  act;  and  it  shall  be  the  duty  of  the  several 
district  attorneys  of  the  United  States,  in  their  respective  dis- 
tricts, under  the  direction  of  the  Attorney-General,  to  institute 
proceedings  in  equity  to  prevent  and  restrain  such  violations. 
Such  proceedings  may  be  by  way  of  petition  setting  forth  the 
case  and  praying  that  such  violations  shall  be  enjoined  or  other- 
wise prohibited.  When  the  parties  complained  of  shall  have  been 
duly  notified  of  such  petition  the  court  shall  proceed,  as  soon 
as  may  be,  to  the  hearing  and  determination  of  the  case;  and 
pending  such  petition  and  before  final  decree  the  court  may  at 
any  time  make  such  temporary  restraining  order  or  prohibition 
as  shall  be  deemed  just  in  the  premises. 

Section  5.  Whenever  it  shall  appear  to  the  court  before  which 
any  proceeding  under  section  four  of  this  act  may  be  pending 
that  the  ends  of  justice  require  that  other  parties  should  be 
brought  before  the  court,  the  court  may  cause  them  to  be  sum- 
moned, whether  they  reside  in  the  district  in  which  the  court 
is  held  or  not;  and  subpoenas  to  that  end  may  be  served  in  any 
district   by   the   marshal   thereof. 

Section  6.  Any  property  owned  under  any  contract  or  by  any 
combination,  or  pursuant  to  any  conspiracy  (and  being  the  sub- 
ject thereof)  mentioned  in  section  one  of  this  act,  and  being  in  the 
course  of  transportation  from  one  state  to  another,  or  to  a 
foreign  country,  shall  be  forfeited  to  the  United  States,  and  may 
be  seized  and  condemned  by  like  proceedings  as  those  provided 
by  law  for  the  forfeiture,  seizure  and  condemnation  of  property 
imported  into  the  United  States  contrary  to  law. 

Section  7.  Any  person  who  shall  be  injured  in  his  business 
or  property  by  any  other  person  or  corporation  by  reason  of 
anything  forbidden  or  declared  to  be  unlawful  by  this  act,  may 
sue  therefor  in  any  circuit  court  of  the  United  States  in  the 
district  in  which  the  defendant  resides  or  is  found,  without 
respect  to  the  amount  in  controversy,  and  shall  recover  three- 
fold the  damages  by  him  sustained,  and  the  costs  of  suit,  in- 
cluding a  reasonable  attorney's  fee. 


588  SUPPLEMENTARY    FORMS 

Section  8.  That  the  word  "  person,"  or  "  persons,"  wherever 
used  in  this  act  shall  be  deemed  to  include  corporations  and 
associations  existing  under  or  authorized  by  the  laws  of  either 
the  United  States,  the  laws  of  any  of  the  territories,  and  the 
laws  of  any  state,  or  the  laws  of  any  foreign  country. 


FORM   65 
ANTI-TRUST  ACT  OF  THE  STATE  OF  KANSAS 

Be  it  enacted  by  the  Legislature  of  the  State  of  Kansas: 

Section  1.  That  all  arrangements,  contracts,  agreements, 
trusts  or  combinations  between  persons  or  corporations  made 
with  a  view  or  which  tend  to  prevent  full  and  free  competition 
in  the  importation,  transportation  or  sale  of  articles  of  domestic 
growth  or  product  of  domestic  raw  material,  or  in  the  loan  or 
use  of  money,  or  to  fix  attorneys'  or  doctors'  fees,  and  all  ar- 
rangements, contracts,  trusts  or  combinations  between  persons  or 
corporations  designed  or  which  tend  to  advance,  reduce  or  con- 
trol the  price  or  the  cost  to  the  producer  or  to  the  consumer  of 
any  such  products  or  articles,  —  are  hereby  declare^!  to  be 
against  public  policy,  unlawful  and  void. 

Section  2.  It  shall  not  be  lawful  for  any  corporation  to  issue 
or  to  own  trust  certificates,  other  than  the  regular  and  lawfully 
authorized  stock  thereof,  or  for  any  corporation,  agent,  officer 
or  employes,  or  the  directors  or  stockholders  of  any  corporation, 
to  enter  into  any  combination,  contract  or  agreement  with  any 
person  or  persons,  corporation  or  corporations,  or  with  any  stock- 
holder or  director  thereof,  the  purpose  and  effect  of  which  com- 
bination, contract  or  agreement,  shall  be  to  plnco  the  manage- 
ment or  control  of  such  combination  or  combinations,  or  the 
manufactured  product  thereof,  in  the  hands  of  any  trustee  or 
trustees,  with  the  intent  to  limit  or  fix  the  price  or  lessen  the 
production  and  sale  of  any  article  of  commerce,  use,  or  con- 
sumption, or  to  prevent,  restrict,  or  chminish  the  manufacture 
or  output  of  any  such  article. 

Section  3.  That  all  persons  entering  into  any  such  arrange- 
ment, contract,  agreement,  trust,  or  combination,  or  who  shall, 
after  the  passage  of  this  act,  attempt  to  carry  out  or  act  under 


SPECIMENS    OF    REGULATORY    LAWS       589 

any  such  arrangement,  contract,  agreement,  trust  or  combination 
described  in  sections  one  or  two  of  this  act,  either  on  his  own 
account  or  as  agent  or  attorney  for  another,  or  as  an  officer, 
agent  or  stockholder  of  any  corporation,  or  as  a  trustee,  commit- 
tee, or  in  any  capacity  whatever,  shall  be  guilty  of  a  misdemeanor, 
and  on  conviction  thereof  shall  be  subject  to  a  fine  of  not  less 
than  one  hundred  dollars  and  not  more  than  one  thousand  dollars, 
and  to  imprisonment  not  less  than  thirty  days  and  not  more  than 
six  months,  or  to  both  such  fine  and  imprisonment,  in  the  dis- 
cretion of  the  court. 


FORM  66 

MARYLAND'S  BLUE  SKY  LAW 

CHAPTER  NO.  552. 

An  ACT  to  prevent  fraud  respecting  securities  offered  for  sale 
within  the  State  of  Maryland,  and  to  provide  a  summary  pro- 
ceeding therefor,  and  for  other  purposes  relating  thereto,  by 
adcUng  four  (4)  additional  sections  to  Article  32A  of  the  Anno- 
tated Code  of  Public  General  Laws  of  Maryland,  entitled  "  De- 
partment of  Law,"  to  be  numbered  11,  12,  13  and  14. 

Section  1.  Be  it  enacted  by  the  General  Assembly  of  Mary- 
land, That  (4)  new  sections  are  hereby  added  to  Article  32A 
of  the  Annotated  Code  of  Public  General  Laws  of  Maryland, 
entitled  "Department  of  Law,"  to  be  known  as  Sections  11,  12, 
13  and  14,  for  the  purpose  of  preventing  fraud  respecting  securi- 
ties offered  for  sale  in  the  State  of  Maryland,  and  to  provide 
a  simamary  proceeding  therefor,  and  for  other  purposes  relating 
thereto,  said  sections  to  read  as  follows: 

Section  11.  If  it  shall  appear  to  the  Attorney  General  of  the 
State  of  Maryland  that  in  the  issuance,  sale,  promotion,  negotia- 
tion, advertisement  of,  or  distribution  of  any  stocks,  bonds,  notes 
or  other  securities  within  the  State  of  Maryland,  any  person, 
partnership  or  corporation  is  employing  or  is  about  to  employ 
any  device,  scheme  or  artifice  to  defraud,  or  for  obtaining  money 
or  property  by  means  of  any  false  or  fraudulent  pretense,  repre- 
sentation or  promise,  or  the  said  Attorney  General  believes  it  to 


590  SUPPLEMENTARY    FORMS 

be  in  the  interest  of  the  piibUc  that  an  investigation  be  made  with 
a  view  to  the  issuance  of  an  order,  such  as  herein  provided,  he 
may  require  such  person,  partnership  or  corporation  to  file  with 
him  a  statement  in  writing  under  oath  as  to  all  facts  concerning 
the  same,  and  for  that  purpose  may  prescribe  forms  upon  which 
said  statements  shall  be  made.  The  Attorney  General  may  re- 
quire, in  addition  thereto,  such  further  data  and  information  as 
he  may  deem  relevant  and  make  such  special  investigation  as 
may  be  necessary  and  for  the  purposes  of  this  Act  the  Attorney 
General,  or  an  Assistant  Attorney  General  duly  authorized  by 
him,  shall  have  power  to  require  by  subpoena  or  summons,  the 
attendance  and  testimony  of  witnesses  and  the  production  of 
any  books,  accounts,  records,  papers  and  correspondence  relat- 
ing to  any  matter  which  the  Attorney  General  is  authorized  by 
this  Act  to  consider  or  investigate.  The  Attorney  General,  or  his 
duly  authorized  assistant,  may  sign  subpoenas,  administer  oaths 
and  affirmations,  examine  witnesses  and  receive  evidence.  In 
case  of  disobedience  to  a  subpoena  or  of  the  contumacy  of  any 
witness  appearing  before  the  Attorney  General  or  his  duly 
authorized  Assistant  Attorney  General,  the  Attorney  General 
may  invoke  the  aid  of  the  Circuit  Court  of  any  of  the  counties 
of  the  State  of  Maryland,  or  of  the  Superior  Court  of  Baltimore 
City.  Such  court  may  thereupon  issue  an  order  requiring  the 
person  subpoenaed  to  obey  the  subpoena  or  to  give  evidence  or 
produce  books,  accounts,  records,  papers  and  correspondence 
touching  the  matter  in  question.  Any  failure  to  obey  such  order 
of  the  court  may  be  punished  by  such  court  as  a  contempt 
thereof.  In  the  case  of  a  failure  or  refusal  of  any  person,  part- 
nership or  corporation  concerned  in  the  issuance,  sale,  offer  for 
sale,  promotion,  advertisement  or  distribution  of  any  stocks, 
bonds,  notes,  or  other  securities  within  the  State  of  Maryland,  to 
file  any  statement  or  to  furnish  any  information,  books,  papers 
or  records  required  by  the  Attorney  General  or  his  duly  author- 
ized assistant,  to  be  filed  or  furnished  in  ronneclion  with  such 
investigation  under  this  Act,  the  Attorney  General  may  issue  his 
order  imder  Section  12  of  this  Act. 

Section  12.  The  Attorney  General  may,  upon  evidence  satis- 
factory to  him,  that  in  the  issue,  sale,  iiromotion,  negotiation, 
advertisement  of,  or  distribution  of  any  stocks,  bonds,  notes  or 


SPECIMENS    OF    REGULATORY    LAWS       591 

other  securities  within  the  State  of  Maryland,  any  person, 
partnership  or  corporation  is  employing  or  is  about  to  employ 
any  device,  scheme  or  artifice  to  defraud,  or  for  obtaining  money 
or  property  by  means  of  any  false  or  fraudulent  pretense,  repre- 
sentation or  promise,  issue  and  cause  to  be  served  upon  such 
person,  partnership  or  corporation  an  order  requiring  the  party 
guilty  thereof  to  cease  and  desist  therefrom.  If  it  shall  appear 
to  the  Attorney  General  that  an  irreparable  public  injury  is 
imminent  unless  such  an  order  is  issued  before  a  full  investigation 
can  be  made  pending  such  investigation,  he  may  issue  such  order 
but  the  same  shall  be  accompanied  with  a  request  for  information 
as  to  the  facts  relied  on  in  issuing  the  order,  and  such  temporary 
order  shall  only  remain  in  force  until  such  information  is  fur- 
nished and  two  days  thereafter.  Orders  of  the  Attorney  General 
under  this  section  may  be  served  by  anyone  duly  authorized  by 
the  Attorney  General  either  (a)  by  delivering  a  copy  thereof 
to  the  person  to  be  served;  or  to  a  member  of  the  partnership 
to  be  served,  or  to  the  president,  vice-president,  secretary  or 
other  executive  officer  or  director  of  the  corporation  to  be  served; 
or  (b)  by  leaving  a  copy  thereof  at  the  principal  office  or  place 
of  business  of  such  person,  partnership  or  corporation;  or  (c) 
by  registering  and  mailing  a  copy  thereof,  addressed  to  such  per- 
son, partnership  or  corporation  at  his  or  its  principal  office  or 
place  of  business.  A  verified  return  by  the  person  so  serving  said 
order,  setting  forth  the  manner  of  said  service,  shall  be  prima 
facie  proof  of  the  same,  and  the  return  postoffice  receipt  for  said 
order  registered  and  mailed  as  aforesaid  shall  be  prima  facie 
proof  of  the  service  of  the  same,  as  aforesaid. 

Section  13.  Any  person,  partnership  or  corporation  affected 
or  aggrieved  by  the  order  of  the  Attorney  General  under  Section 
12  shall  be  entitled  to  a  hearing  de  novo  before  the  Circuit  Court 
of  the  county  in  which  said  person,  partnership  or  corporation 
has  performed  or  is  alleged  to  have  performed  the  acts  referred 
to  in  said  order  of  the  Attorney  General,  or  in  the  Superior  Court 
of  Baltimore  City,  if  said  acts  or  alleged  acts  occurred  in  Balti- 
more City,  or,  at  the  option  of  said  person,  partnership  or  cor- 
poration, said  proceeding  for  a  hearing  de  novo  may  be  filed 
in  the  Circuit  Court  for  the  County  in  which  said  person, 
partnership   or   corporation   resides   or   has   its   principal   office 


592  SUPPLEMENTARY    FORMS 

within  the  State  of  Maryland,  or  in  the  Superior  Court 
of  Baltimore  City,  if  such  residence  or  office  is  in  Bal- 
timore City.  And  in  such  proceeding  any  such  person,  partner- 
ship or  corporation  shall  be  entitled  to  have  any  issues  of  facts 
arising  therein  determined  by  a  jury,  provided  written  demand 
is  filed  at  the  time  of  the  institution  of  said  proceeding.  The 
court  shall  have  power  during  the  pendency  of  the  proceeding 
before  it,  to  suspend  or  modify  the  order  of  the  Attorney  General 
and  to  enter  an  appropriate  judgment  or  order  at  the  conclu- 
sion of  such  hearing  to  modify,  affirm  or  set  aside  order.  From 
the  final  order  or  judgment  of  the  said  court,  either  party  to 
said  proceeding  may  appeal  to  the  Court  of  Appeals  of  Mary- 
land as  in  other  cases  or  suits  at  law  arising  in  said  court;  and,  in 
case  of  such  appeal,  the  testimony  adduced  before  the  court 
shall  be  presented  to  the  Court  of  Appeals  by  bills  of  exception 
in  customary  form,  as  in  other  law  cases,  and  the  Court  of  Ap- 
peals may  review  the  questions  of  law  arising  on  said  appeal  as 
in  other  appeals  from  courts  of  law  and  in  ordinary  course. 

Section  14.  Any  person,  partnership  or  corporation  having 
been  served  with  any  order  of  the  Attorney  General  under  Sec- 
tion 12  of  this  Act,  or  having  knowledge  of  the  issuance  of  said 
order  and  while  said  order  remains  in  effect,  either  as  originally 
issued  or  as  modified,  who  or  which  shall  execute  or  carry  on  in 
any  manner  any  scheme  or  device  against  said  order  has  been 
issued,  or  wilfully  attempts  so  to  do,  or  shall  sell  or  deliver  or 
receive  payment  in  money  or  property  for  any  paper,  certificate 
or  instrument  purporting  to  be  or  represent  any  interest  in  or 
order,  for  stocks,  bonds,  notes  or  other  securities  mentioned  in 
said  order  of  the  Attorney  General,  or  shall  publish  or  cause  to 
be  published  any  advertisement  of  any  such  stocks,  bonds,  notes 
or  other  securities  pursuant  to  said  scheme  or  device  against 
which  said  order  has  been  issued,  shall  be  guilty  of  a  misdemeanor 
and,  upon  conviction,  shall  be  fined  not  more  than  ten  thousand 
dollars  ($10,000)  or  imprisoned  not  more  than  two  years,  or 
be  subject  to  both  fine  and  imi)risonment,  in  the  discretion  of 
the  court. 

Section  2.  Be  it  enacted,  That  this  Act  shall  take  effect  June 
1,  1020. 

Approved  April  16,  1920. 


INDEX 


Abuses,     kinds     that     call     for 
criticism,  408 

legislation  and  reports  against 
trusts,  407 

Acommenda,  46 

Adams  Express  Co.,  107 

Addystone  Pipe  Pool,  269 

Administration     of     corporation, 
189 

Administrative  abuses,  408 

Affiliated  company,  208 

Agreements,  254;   See  also  Fac- 
tor's agreements 

Aktiengesellschaft,   100 

Aktiengesellschaft  fiir  Rheinisch- 
Westfiilische   Industrie,  370 

Allen  &  Ginter,  384,  385 

Allgemeine    Elektrizitiitsge- 
sellschaft,  371,  374,  375 

Amalgamations,  210,  255;   of  in- 
dustrial subsidiaries,  338 

Amer.  Bell  Telephone  Co.,  335 

Amer.    Booksellers'    Assn.,    247, 
275 

Amer.   Can   Co.,   429;    securities 
turnover,  94 

Amer.  Cigar  Co..  392,  394 

Amer.  Cotton  Oil  Trust.,  318,  321 

Amer.  Druggists'  Syndicate,  247, 
348 

Amer.  Foreign  Securities  Co.,  300 

Amer.  Ice  Co.,  427 

Amer.  International  Corporation, 
300-301,  367 

Amer.  Iron  and  Steel  Institute, 
278 

Amer.  Locomotive  Co.,  securities 
turnover,  94 

Amer.  Malting  Co.,  422 


Amer.  Milling  Co.,  balance  shee's 
146,  147 

Amer.  Pipe  &  Construction  Se- 
curities Co.,  368 

Amer.  Power  and  Light  Co.,  364 

Amer.  Publishers  Assn.,  247,  275 

Amer.  Smelting  &  Refining  Co., 
securities  turnover,  95;  under- 
writing profit,  415 

Amer.  Snuff  Co.,  392 

Amer.  Stogie  Co,.,  392,  396 

Amer.  Sugar  Trust,  229 

Amer.  Telephone  &  Telegraph 
Co.,  247;  as  control  company, 
335;  chart  of  control,  336;  se- 
curities turnover,  94 

Amer.  Tobacco  Co.,  207,  264,  271, 
428;  exclusive  arrangements, 
264;  sketch  of  growth  (from 
the  Supreme  Court  decision), 
383-104 

Amer.  Window  Glass  Co.,  272, 
487 

Annual  meetings.  See  Stock- 
holders' meetings 

Anti-trust  legislation,  407;  fed- 
eral, 440,  442;  Kansas  Anti- 
Trust  Act,  588 

Armour  &  Co.,  315.  316 

Articles  of  association,   101,  157 

Articles  of  co-partnership,  55 

Articles   of   incorporation,   157 

Assets,  corporation,  146;  di- 
rectors' resolution  for  sale, 
form,  538;  dividends  out  of, 
422;  sale,  537;  stockholders' 
resolution  for  sale,  form,  538; 
wasting,  421 

Associated  assistants,  31 


593 


594 


INDEX 


Associated  Bell  Companies,  336 

Associated  Dry  Goods  Corpora- 
tion, 248,  348 

Association,  256 

Associations,  as  business  combi- 
nations, i;56;  business  men's, 
254,  256;  business  men's  in 
other  countries,  260;  classes  of 
business  men's,  257-258;  gen- 
eral commercial,  258;  special 
trades,  259 

Associazione  in  participazione, 
47 

Assumption  companies,  294,  356, 
380;  See  also  Finance  and 
assumption  companies 

Atlantic  Coast  Line,  pyramided 
control,  313,  314 

Atlantic,  Gulf  and  West  Indies 
Steamship  Lines,  347 

Atlantic  Snuff  Co.,  393 

Auditor  of  corporation,  195 

Audits,  195 

Automobile  industry,  251 ;  char- 
ter, object  clause  form,  483 

Autosales  Corporation,  487 

Baltimore  &  Ohio  R.  R.  Co.,  203 

Bank  fiir  Elektrische  Unterneh- 
mungen,  holdings,  371-373 

Banking,  Italian,  46;  Sec  also 
Banks 

Bankruptcy,  24;  individual,  41; 
participation  associations,  50; 
trusts  and,  229 

Banks,  13;  close  interrelation 
with  railroad  and  railroad 
equipment  companies  (chart), 
opp.  417;  double  liability  of 
stockholders,  115;  finance  oper- 
ations, 358 

Barter,  10 

Battle  Ax  Plug,  428 

"Bears,"  424 

Beaver  skins,  11 

Beet  sugar  companies  in  Ger- 
many, 102 


Belgium,  combinations,  253;  fi- 
nance companies,  378 

Bell  System,  335 

Bell  Telephone  Co.  of  Pennsyl- 
vania, 210 

Beneficiaries  of  trusts,  214,  220; 
liability,  223;  rights  and 
powers,  221 ;  transferability  of 
interest,  223 

Bethlehem  Steel  Co.,  309 

Big  business,  199,  200;  abuses, 
408 

Blacklisting,  429 

"  Blue  sky "  laws,  437 ;  Mary- 
land's law,  589 

Board  of  directors.  See  Directors 

Bobbs-Merrill  Co.,  275 

Bogus  companies,  207,  428 

Bond  conversion  of  U.  S.  Steel 
Corporation,   419 

Bond  dividends,  187 

Bonds,  13,  14,  83,  86,  124,  135; 
bond  certificate,  simple  form, 
501,  502;  forms,  496;  methods 
of  pa^Tnent,  139;  mortgage  to 
secure  bonds,  short  form,  497; 
principal,  139;  rate  of  return, 
139;  state  limitation,  434; 
structural  elements,  136;  va- 
rieties, 136 

Book  trade,  247,  275 

Boot  and  shoe  industry,  246 

Boston  real   estate  trusts,  232 

Boycotting,  429 

Brazil   coffee  valorization.  273 

Brewers'  Assn.,  268 

British  East  India  Co.,  106 

British  Industries,  Federation  of, 
260 

Brokers,  charter,  object  clause 
form,  485;  in  securities,  92; 
stock  held  by,  96 

"Bulls,"  424 

Burlcy  Tobacco  Growers'  Assn., 
271 

Business  Corporation  Laws  of 
New  Hampshire,  151,  156 


INDEX 


595 


Business  corporations,  120.  197; 
See  also  Corporations 

Business  establishments,  classi- 
fication, 4;  definition,  3;  func- 
tion, 4;  plasticity,  5 

Business  men's  associations,  254, 
256 

Business  trust,  213;  agreement 
and  declaration  (Mass.  Gas 
Companies),  540;  See  also 
Trusts 

By-laws,  503 ;  adoption,  164 ;  con- 
tents, list  of  topics  treated, 
165;  of  corporations,  163;  pur- 
pose, 164;  standard  form  (i.e. 
U.  S.  Steel  Corporation), 
503 

Calendar,  corporate,   193 

California  Fruit  Growers'  Assn., 
271 

California  Patents  Co.,  415 

Call  loan,  424 

Capacity  production,  239,  240 

Capital,  as  foundation  of  owner- 
ship organization,  3;  concept, 
and  its  influence  on  organiza- 
tion, 8;  concept  as  keystone 
of  arch  of  business,  8 ;  changing 
concept,  history,  8;  commodi- 
ties as,  9;  dividends  out  of, 
422,  426;  growth  of  concept, 
9;  increase  of  requirements, 
24;  limitations  in  individual 
proprietorship,  43;  money  as 
capital,  12;  securities  capital, 
16 

Capital   Issues   Committee,  449 

Capital  stock,  124 ;  charter  clause 
as  to,  160;  charter  clauses  for, 
485;  par  and  non-par  value, 
124,  125 

Capitalist,  laborer  distinguished 
from,  12 

Capitalization,  definition  in  refer- 
ence to  corporations.  143;  rail- 
tpays  in  the  United  States,  147, 


148;  state  requirements  and 
regulation,  434 

Carnegie  Steel  Co.,  72,  125 

Cash  dividend,  186 

Cecil  Rhodes  group  of  finance 
and  investment  companies, 
376-377 

Central  District  Telephone  Co., 
(of  Pa.),  210 

Central  Massachusetts  Light  & 
Power  Co.,  322 

Central  Pacific  R.  R.  Co.,  306 

Central  purchase  pools,  272 

Central   Sugar   Corporation,   487 

Centralized  sales  plan  of  pool, 
270 

Centralization,  30 

Certificate  of  incorporation,  157; 
See  also  Charters 

Certificates,  joint  stock  com- 
panies, 103;  stock,  126;  stock, 
forms,  488;  See  also  Stock  cer- 
tificates 

Chamber  of  Commerce,  Inter- 
national, 261 

Chamber  of  Commerce  of  the 
State  of  New  York,  258 

Chamber  of  Commerce  of  the 
U.  S.  A.,  258 

Chambers  of  Commerce,  258 

Charters,  479;  application  by  in- 
corporators, 152;  certificatiou, 
154;  character,  powers  con- 
ferred by,  158;  control  com- 
pany, industrial  (i.e.  U.  S. 
Steel  Corporation,  amended), 
573;  corporation,  111;  form  of 
certificate  of  incorporation 
(State  of  New  York),  480; 
main  features  and  provisions, 
158;  nomenclature,  157;  object 
or  purpose  clauses,  forms  for, 
482 ;  pure  securities-holding 
coiporation  (i.e.  Northern  Se- 
curities Co.),  581;  recording, 
154 ;  states  with  '"  bargain 
counters,"  200;  taxes,  154 


596 


INDEX 


Chicago  Bearing  Metal  Co.,  316- 
317 

Chicago  Securities  Co.,  300 

Cigarette  manufacturing  con- 
cerns, 384 

Cincinnati,  New  Orleans  &  Texas 
Pacific  Railway  Co.,  307 

Cities,  commercial  associations 
in,   258 

Cities  Service  Co.,  364,  365, 
366 

City  Investing  Co.,  300 

Civil  law,  40 

Claflin  (H.  B.)  &  Co.,  347-348, 
417 

Clayton  Act  of  1914,  262,  427; 
provisions,  446 

Close  corporation,  166 

Cluett,  Peabody  &  Co.,  securi- 
ties turnover,  95 

Co-adventurers,  69 

Coal  industry  in  Germany,  281, 
284 

Coffee  valorization,  273 

Collateral  trust  bonds,  138 

Columbia  Graphophone  Mfg. 
Co.,  488 

Combination  organizations,  237 

Combination  trusts,  176,  232,  233 

Combinations,  17;  causes,  238; 
classification,  253;  direction  in 
which  they  may  take  place, 
244;  European  history,  251- 
252;  fluctuating  course  of  for- 
mation, 251 ;  group  not  involv- 
ing ownership  rights,  254,  256; 
horizontal  and  vertical,  244, 
245;  in  restraint  of  trade,  430; 
prevalence,  237 

Commandatary,   45 

Commenda,  46,  52 

Commercial  associations,  general, 
258 

Commercial  capital,  13 

Commercial  paper,  securities  and, 
80;   three  kinds,  80 

Commodities,    as    only    form    of 


capital,   9;    direct   exchange  — 
barter,   10 
Commodity  paper,  80,  81 
Common   law,    18;    organization 

based  on,  22 
Common    stock,    128;    classifica- 
tion, 131 
Commonwealth  Gas  and  Electric 

companies,    323 
Competition,    17,   265,   352;    un- 
fair, 427,  446 
Comptroller  of  corporation,  195 
Concentration,  237,  238 
Conditional   requirements,  262 
Congress,    power    over    business, 

20 
Conley  Foil  Co.,  392,  394 
Consolidated  Goldfields  of  South 

Africa,  Ltd.,  377 
Consolidated  Lake  Superior  Co., 

422 
Consolidated  Steel  Corporation, 

271-272 
Consolidated  Tobacco  Co.,  398 
Consolidation     of     corporations, 
209;  directors'  resolution,  form, 
571 ;     shareholders'    resolution 
authoi'izing,  form,  573 
Constitution,  U.  S.,  19 
Continental  Tobacco  Co.,  389 
Contract  control,  303,  304,  305 
Contracts,     co-partnership,     53 ; 
participation  associations  and, 
48 
Control,  by  agreement,  304;  by 
contract,    303,    304,    305;     by 
participation,    303,    304.    307; 
directness,  28;    elimination   of 
personal,    97;    individual    pro- 
prietorship, 42;   instrumentali- 
ties, 303;  pyramided,  308 
Control  companies,  294 ;   advan- 
tages,   349;    among    industrial 
corporations,  337;  among  pub- 
lic utilities,  335;  chart  of  types 
of  inter-coiporate  control,  325; 
charter   of   an    industrial   con- 


INDEX 


597 


trol  company  (i.e.  of  U.  S. 
Steel  Corporation,  amended), 
573;  holding  companies  as, 
323;  in  ocean  transportation, 
345;  in  other  countries,  348; 
mercantile,  347 ;  monopolistic 
—  growth  of  Amer.  Tobacco 
Co.,  383-404;  railroads,  327; 
trusts  as,  318;  weaknesses,  353 

Control  of  prices,  261 

Conversions,  418,  419 

Convertible  stock,  134 

Conyngton,  Thomas,  70,  125,  163, 
164,  175 

Co-partnership,  articles  of,  55 

Copper  syndicate,  273 

Com  Products  Co.,  353 

Comer,  424,  425,  426 

Corporate  calendar,  193 

Corporate   control,  432 

Corporate  bond.    See  Bonds 

Corporate  securities,  124;  See 
also  Securities 

Corporate  signatures,  536,  537 

Corporation  Journal,  156 

Corporation  laws,  431 ;  revision, 
systematic,  435 

Corporations,  14,  89,  99,  109; 
abuses  in  securities-holding, 
207;  advantages,  120;  applica- 
tion for  charter,  152 ;  auditor, 
195 ;  business  coi-poi'ations, 
120;  by-laws,  163,  503;  capital 
stock,  charter  provisions,  160; 
capitalization,  143 ;  charter, 
479;  charter,  form  for,  480; 
charter,  forms  for  object  or 
purpose  clauses,  482 ;  classifica- 
tion, 119;  comptroller,  195; 
consolidation,  209 ;  construc- 
tion of  the  term  in  special 
states,  151;  counsel,  195;  crea- 
tion, 111;  credit,  122;  defini- 
tion, 110;  direction  and  con- 
trol, 115;  directors,  board  of, 
177;  disadvantages,  122;  dis- 
solution and  termination,  117, 


537;  duration  and  liability  in 
charter,  161 ;  eleemosynary, 
120;  external  influences  favor- 
ing, 199;  financial  statement, 
form,  535;  formation,  proce- 
dure, 151 ;  forms  and  docu- 
ments used  in  organizing,  473; 
franchise  fees  of  selected  states, 
154;  general  contract  to  form 
(State  of  Illinois),  473;  gen- 
eral corporation  laws,  150;  gen- 
eral executive  ofiicers,  190; 
general  features,  109;  general 
manager,  191;  history,  109;  in- 
corporators, particulars  as  to, 
161 ;  lack  of  uniformity  in  the 
United  States,  113;  legal  status, 
111;  liability,  114;  location  of 
main  office,  159;  meetings  for 
organization,  155;  mining,  128; 
municipal,  119,  120;  name, 
159;  number  in  given  indus- 
tries compared  with  individu- 
als, 198;  object  and  purpose, 
159;  obligations,  117;  officers, 
189;  onerous  obligations,  31; 
operating  mechanism,  166;  or- 
ganization taxes  and  fees,  154; 
organizing  —  cut  and  dried 
procedure,  157;  organizing  — 
method  of  procedure,  151 ;  or- 
ganizing —  reversed  procedure, 
156;  over-capitalization,  148; 
ownership,  114;  permanence 
and  stability,  116;  preference 
for  this  form  of  ownership  or- 
ganization, 197;  pre-incorpora- 
tion  agreement,  152 ;  president 
and  his  duties,  190;  principles 
of  control,  112;  qualifications 
of  incorporators,  152 ;  records, 
193;  regulations  governing 
operation,  119;  reorganizations, 
117;  reports,  118;  right  to  in- 
spect books  of,  129;  secretary 
and  his  duties,  192 ;  securities- 
holding  type,  202 ;  simple  type, 


598 


INDEX 


201,  202;  special  laws,  150; 
special  provisions,  162 ;  sphere 
of  activity,  113;  standing  com- 
mittees, 162;  states  that  en- 
courage, 200;  stockholders, 
1.67;  subscription  list,  simple 
form,  478;  taxation  (federal) 
less  than  other  forms  of  or- 
ganization, 200;  taxes,  118; 
three  distinct  bodies,  166; 
treasurer  and  his  duties,  191 ; 
trustee's  subscription  list,  form, 
479;  types,  from  standpoint  of 
structure,  200;  use  of  this  form 
of  ownership  organization,  197 ; 
vice-president,  191 ;  voting 
powers  of  stockholders,   133 

Cotton,  cornering  supply,  272, 
273 

Cotton  textile  industry,  246 

Counsel,  corporation,   195 

Court  of  equity,  trusts  and,  220, 
228 

Credit,  14;  corporation,  122;  in- 
dividual, 42 

Credit   Mobilier,   359 

Creditor  paper,  84 

Creditors,  protection  of  interests, 
452;  suits  against  partners, 
62 

Crops  and  industrial  revival  of 
1897,  249 

Cummins  Bill,   441 

Cumulative  preferred  stock,  133 

Cumulative  voting,  173 

Curtailment  of  output,  268,  282 

Dartmouth  College  case,  110,  112 

Death,  27 

Debenture,  137 

Debenture  bonds,  138 

Debenture  stock.   134 

Debentures  and  short  time  notes, 
141 

Debts,  partners'  liability,  61 

Delaware,  436;  charters  to  cor- 
porations, 200 


Delaware,  Lackawanna  &  West- 
ern R.  R.  Co,  306 

Delegation  of  powers  by  di- 
rectors,   183 

Demand,  240;  see  also  Supply 
and  Demand 

Department  stores  charter,  ob- 
ject clause  form,  483 

Depreciations,  421 

Des  Moines  Union  Railway  Co, 
311 

Dewing,  A.  S,  123,  170;  on  pro- 
motions, 412;  on  promoters' 
profits,  416 

Diamond  Match  Co,  246,  426 

Differential  voting,  174 

Direction,  in  individual  pro- 
prietorship, 42;  in  partner- 
ships, 57;  problems,  28 

Directness  of  control,  28 

Directors,  board  of,  29;  board 
of,  in  joint  stock  companies, 
104;  chairman  of  the  board, 
189;  charter  provisions  as  to, 
161;  classification,  162,  178; 
compensation,  181 ;  of  corpora- 
tions, 116;  cumulative  plan  of 
electing,  173;  delegation  of 
authority,  183;  election,  155, 
178;  executive  committee  and 
finance  committee,  184;  func- 
tion of  the  board,  177;  indi- 
vidual director's  relation  to 
corporation,  181 ;  managerial 
power,  182 ;  meetings,  188,  522 ; 
meetings,  call  and  waiver  for 
first  meeting,  form,  523-524; 
miscellaneous  powers,  188;  no- 
tice of  election  as  director, 
form,  530;  number,  179;  power 
to  declare  dividends,  185; 
powers  of  board,  182;  powers 
of  individual,  181 ;  qualifica- 
tions, 161,  179;  removal,  179; 
residence,  180;  resolution  de- 
claring dividend,  forms,  533, 
534;   resolution  for  consolida- 


INDEX 


599 


tion,  form,  571 ;  resolution  for 
special  meeting,  form,  527;  re- 
sponsibilities indefinite,  411; 
sale  of  assets,  form  of  resolu- 
tion, 538;  small  holdings  re- 
quired, 409;  term  of  office,  178; 
vacancies  in  board,  power  to 
fill,  184 

Dissolution  of  corporation,  537; 
form  of  notice,  539 

Dissolution  of  partnership,  form 
of  notice,  466 

Distilleries,  268 

Distillers'  and  Cattle  Feeders' 
Trust,  318,  321 

Dividends,  533;  directors'  resolu- 
tion declaring,  forms,  533;  il- 
legal, 188;  kinds,  186;  notice 
of  dividend  in  form  of  prop- 
erty, form,  534;  policies  con- 
cerning, 421 ;  power  to  declare, 
185;  power  to  declare,  in  joint 
stock  companies,  104 ;  preferred 
stockholders,  132;  procedure  in 
declaring,  186;  statutory  re- 
strictions on  declaration,  185; 
stockholders'  rights  to,  130; 
treasurer's    notice,   form,   534 

Dodd,  S.  C.  T.,  318 

Doherty,  H.  L,  366 

Domestic  organizations,  22 

Dormant  partners,  63 

Double  liability,  115 

Double  taxation,  228 

Dresdener  Bank,  374 

Drug  industiy,  247;  pool,  273 

Druggists'  Associations,  274 

Drummond  Tobacco  Co.,  388, 
389 

Dry  goods  trade,  348 

"Dry"    trust,    213 

Duke,  J.  B.,  389,  398 

Duke  (W.),  Sons  &  Co.,  384,  385 

''  Dummy  "  corporation,  157 

Dummy  directors,  180,  409 

Dummy  organization,  334 

Dummy  stockholders,  313,  315 


Du  Pont  (E.  I.)  de  Nemours  & 
Co.,  206,  310;  General  Motors 
Corporation  and,  312;  local 
price  cutting,  428;  varied  in- 
terests, 345 

Durability,  25;  of  individual 
proprietorship,  41 

Eastman  Kodak  Co.,  264,  428, 
429 

Economic  development,  5 

Economic  stages,  three  histori- 
cal, 8 

Eddy.  A.  J.,  277 

Election  as  director,  form  of  no- 
tice, 530 

Election  fonns,  529 

Electric  Bond  and  Share  Co., 
362,  363 

Electric    Lamp    Combine,   207 

Electric  lamps,  263 

Electrical  companies,  financing 
subsidiaries,  361 

Electrical  industry,  German  fi- 
nancing. 371 

Electrical  Securities  Corporation, 
362 

Eleemosynary    corporations,    120 

Elkins  Act  of  1903,  440 

England,  business  associations, 
260;  combinations,  252;  cor- 
porations, 201 ;  financial  com- 
panies, 358,  376;  investment 
companies,  296 ;  investment 
trusts,  234;  kartells,  286 

Engrossing,   429 

Entrepreneur,  effect  of  death,  27; 
liability,  23;  private  and  pub- 
lic, 3;  responsibility  of  con- 
trol, 28;  risk  assumed,  12 

Entrepreneurial  organization,  14; 
see  Ownership  organizations 

Equipment,  rigidity,  79 

Equipment  trust  bonds,  138 

Equitable  Life  Insurance  Co., 
414 

Europe,     business     associations, 


600 


INDEX 


260;  combinations,  history, 
251-252;  control  companies, 
348;  corporations  versus  joint 
stock  companies,   107 

European  Petroleum  Union,  376 

Exchange,  medium  of,  10 

Exchanges,   stock,   92 

Exclusive  arrangements,  262,  263, 
429 

Expansion,  24 

Exploration  Co.,  Ltd.,  366 

Export  associations,  259-260; 
steel,  271-272;  textiles,  271 

Export  combinations,  448 

Express  companies,  270 

Factors'  agreements,  254;  as  in- 
struments of  combination,  262; 
conditional  requirements  type, 
262 ;  exclusive  arrangements 
type,  262,  263;  memorandum, 
form,  555;  preferential  ar- 
rangements type,  262,  264; 
three  kinds,  262 

Factory  system,  7 

Failures,  by  financial  misman- 
agement, 416;  individual,  41 

Fairs,  10,  11 

Family  interests,  312,  315 

Federal   control,  453 

Federal  Income  Tax  law  of  1918, 
corporations  and,  200 

Federal   incorporation,   454 

Federal  legislation,  439 

Federal  Shipbuilding  Co.,  206. 
338 

Federal  Trade  Commission,  on 
packing  companies  and  dummy 
holdings,  313,  315,  316;  powers, 
440;  report  on  the  packing 
industry,  324 

Federal  Trade  Commission  Act 
of  1914,  provisions,  444 

Federal   Utilities,  Inc.,  300 

Federation  of  British  Industries, 
260 

P  ederations,     265 ;      advantages, 


287;  disadvantages,  287;  effect 
on   industry,   286 
Fictitious    persons,    control 

through,  316 
Fiduciaries,  control  through,  313 
Fighting  instruments,  428 
Finance    and    assumption    com- 
panies,    356;      American     ex- 
amples, 361;   evaluation,  378; 
in    Germany,    368;     in    other 
countries.    376;     special,    358, 
359 
Finance  companies,  293,  358 
Financial    management,    abuses, 

416 
Financial  readjustments,  418 
Financial  statement  of  a  corpora- 
tion, form,  535 
Financiers,  regulation,  450 
Financing,  abuses,  411;  agencies, 
358;    company,  357;    risk,  380 
Finzer  (John)  &  Brothers,  389 
Foreclosure  control,  304,  309 
Foreclosure  of  corporations,   140 
Foreign  Bond  &  Share  Corpora- 
tion, 300 
Foreign  organizations,  22 
Foreign    trade,    Amer.    Interna- 
tional Corporation,  367;  Webb 
Act,  447 
Foreign  trade  associations,  259- 

260 
Founders'  shares,  135,  302 
France,      business      associations, 

261 ;  combinations,  253 
Franchises,  146 
Free  trade,  252,  286 
J'reight  rates  and  pools,  275 
French  Copper  Syndicate,  273 
Full-line  forcing,  263 
Fur-trading  i)osts,   10 
Fusions,  255 

G.  m.  b.  H.,  374 
Gail   (G.  W.)  &  Ax,  387 
Gary,  Ind.,  206,  338,  359 
Gary,  E.  H.,  278,  418;   dinners, 


INDEX 


601 


278;  on  federal  incorporation, 
456 

Garrett  (W.  E.)  &  Sons,  Inc., 
393 

Gas  and  Electric  Securities  Co., 
366 

Gelegenheitsgesellschaft,  47 

General  Electric  Co.,  211;  fin- 
ance and  assumption  com- 
panies, 361,  364,  365  (chart); 
financing  subsidiaries,  361,  362; 
restraint  of  trade,  263 

General  manager  of  corporation, 
191 

General  mortgage  bond,  138 

General  Motors  Corporation, 
134,  307,  345;  control,  310;  E. 
I.  du  Pont  de  Nemours  &  Co. 
and,  312;   subsidiaries,  206 

General  partners,  63 

German  Steel  Syndicate,  279 

Germany,  business  associations, 
260;  combinations,  211-212, 
252;  electrical  industry,  fi- 
nancing, 371 ;  finance  and  as- 
sumption companies,  368;  rail- 
way construction,  financing 
companies,   374 

Gilds,  256 

Gilmore,  E.  A.,  52 

Gluckauf,  284 

Glucose  Sugar  Ref.  Co.,  149 

Gold  bonds,  140 

Good-will,    146 

Goodwin  &  Co.,  384,  385 

Goods.    See  Commodities 

Gould,  Jay,  estate,  315,  316 

Government,  control,  453;  effect 
on  business,   19,  20 

Government  regulation  of  cor- 
porations, 122 

Grocery  business,  charter,  ob- 
ject clause  form,  484 

Gulf  States  Steel  Co.,  524 

Hammond,  J.  H.,  273 
Hanseatic  League,  257 


Hardware  business  charter,  ob- 
ject clause  form,  483 

Harriman  System,  description, 
328;  railroad  companies  in 
1911    (chart),  331 

Harrows,   276 

Helme  (George  W.)  Co.,  393 

Hepburn  Amendment  of  1906, 
440 

Hill,  J.  J.,  328 

Holding  companies,  16,  202,  294; 
advantages,  349;  among  rail- 
roads, 327;  as  control  com- 
panies, 323;  industrial,  337; 
See  also  Securities-holding  cor- 
porations 

Holding  trust,  232,  233 

Horizontal  combination,  244,  245 

Houston,  D.  F.,  201 

Huntington,  C.  P.,  332 

Illinois  Central  R.  R.   Co.,   524 
Imperial  Tobacco  Co.,  397 
Impersonal  organization,  theoiy, 

77 
Incomes,       12;       summary       of 

sources,  88 
Incorporators,   111;   charter  pro- 
visions  as   to,    161;    qualifica- 
tions, 152 
Indenture,  137 
Indiana  Steel  Co.,  338,  359 
Indirect      control,      explanation, 

312 
Individual     proprietorship,     39; 
capital  limitations,  43;  charac- 
teristics, 40;  direction  and  con- 
trol, 42;  durability,  41;  evalua- 
tion,   44;    formation,    40;    lia- 
bility,  41 
Industrial  associations,  259 
Industrial      companies,      control 
companies  among,  337;   lease- 
holds, 307 
Industrial  revival  of  1897,  249 
Industrial  system  as  favorable  to 
corporate  organization,  199 


602 


INDEX 


Inflation  of  corporate  securities, 
146 

Inheritance,  5 

Insolvency,  27 

Inspectors  of  election,  form  of 
certificate,  530;  form  of  oath, 
529 

Insurance  companies,  407;  in- 
vestments, 301 

Integration,  244,  245,  248;  period 
of,  249 

Interborough-Metropolitan  Co., 
309,  335 

Interest,  ban  on,  46 

Interlocking  directors,  366,  447 

Intermediary  companies,  control 
through,  312 

International  &  Great  Northern 
R.  R.  Co,  316 

International  Chamber  of  Com- 
merce, 261 

International  Harvester  Co,  263, 
428;  securities  turnover,  94 

International  Mercantile  Marine 
Co,  247;  as  control  company, 
345,  346  (chart) ;  securities 
turnover,  94 

Interstate  commerce,  federal  reg- 
ulation,   454 

Interstate  Commerce  Commis- 
sion, report  on  control,  303; 
report  on  intercorporate  rela- 
tions, 324 

Interstate  Commerce  Commis- 
sion Act,  245,  266,  440 

Intimidation,    429 

Investment  brokers'  charter,  ob- 
ject clause  form,  485 

Investment  companies,  294 ; 
American,  299;  criticism,  302; 
in  England,  252,  296;  in  other 
countries,    301-302 

Investment  paper,  80,  81 ;  classi- 
fication, table,  83 

Investment  trust,  232,  234 

Iron  and  steel,  248;  see  also  Steel 
industry 


Italy,  business  associations,  his- 
torical, 46 

Johannesburg  Consolidated  In- 
vestment Co,  Ltd,  378 

Johnson  Tinfoil  &  Metal  Co, 
394 

Joint  adventures,  69 

Joint  control,  explanation,  311 

Joint  sales  plan  of  pool,  270 

Joint  stock  companies,  14,  51,  68, 
99,  100;  articles  of  association 
(contract),  101;  articles  of 
association,  form,  467;  capi- 
talization, 102;  definition,  100; 
disadvantages  and  future  pros- 
pects, 108;  dissolution,  106; 
external  relations,  105;  forma- 
tion, 100;  internal  organiza- 
tion, 103;  legal  status,  105; 
liability  of  members,  106; 
permanence  and  stability,  106; 
stock,  102;  value  and  use,  107 

Joint  Traffic  Assn,  276 

Jurisprudence,    18 

Kansas,  Anti-Trust  Act,  588; 
"  blue  sky  "  law,  437 

Kansas  City  Stock  Yards  Co, 
315 

Kartells,  252,  254,  265;  defini- 
tion, 278;  distribution,  285; 
integration,  284 ;  obstacles, 
279;   purpose,  279;   types,  280 

Kassel    District,    Germany,    284 

Keene,  J.  R,  425 

Kimball  (W.  S.)  &  Co,  384,  385 

Kinney  Tobacco  Co,  384,  385 

Knickerbocker  Trust  Co,  358 

Kolenkontor,  285 

Kommanditgesellschaft,  67 

Kongo  region,  10 

Labor  problems,  federations  and, 
288 

Laborer  and  capitalist  distin- 
guished, 12 


INDEX 


603 


Large  scale  production,  17 

Law,  John,  101,  423 

Laws,  laxity,  409 

Lead   Trust,   318 

Leaseholds,  303;  industrial  com- 
panies, 307;    railroads,  305 

Legal   foundation,   18 

Legal    status,   32 

Legal  title,  subdivision,  205 

Legislation,  federal,  439;  reme- 
dial, 432 

Lehigh  and  Hudson  River  R.  R. 
Co.,  311 

Lenz  &  Co,  374,  375 

Lever  Brothers,  Ltd,  252;  classes 
of  stock,  143 

Liability,  co-adventurers,  69 ; 
corporations,  114;  double,  115; 
of  entrepreneur,  23;  individual 
proprietorship,  41;  limited,  24; 
members  of  joint  stock  com- 
panies, 106;  partnerships,  61; 
syndicate  members,  69 

Licenses,  438;    federal,  456 

Licorice  business,  395 

Liefmann,  ^obert,  16,  72,  286, 
370;  on  electrical  companies' 
financing,  in  Germany,  375- 
376;  on  participation  com- 
panies,  295 

Life  insurance  companies,  influ- 
ence, 414 

Limited  Companies  Act,  252 

Limited  liability,  24;  corpora- 
tions, 114;  states  and,  32 

Limited    partnership,   67 

Loan   capital,    13 

Lobbyists,    257 

Lockwood  Committee,  278 

Lorillard  (P.)  Co,  389 

Louisiana,  53;  law,  19;  limited 
partnerships,  67 

MacAndrews  &  Forbes  Co,  392, 

395 
Machinery,     exclusive      control, 

429 


Macy  (R.  H.)  &  Co,  275 

Management,  corporation  di- 
rectors' power,  182 ;  partner- 
ships, 57;  responsible,  433; 
trustees  as  managers,  215 

Managers'  shares,  302 

Managing   director,   183 

Manipulation    of    markets,    430 

Mannstaedt,   Heinrich,   280,   283 

Manufactures,  export  trade  in 
1897,  250 

Manufacturing,  capital  require- 
ments, 24,  44;  Census  (1909) 
comment  on  corporate  estab- 
lishments, 197;  character  of 
ownership  organization,  89 ; 
individual  proprietorship  and, 
44;  partnerships  in,  70 

Marburg   Brothers,   386 

Margin,  424 

Market,  territorial  division  of, 
269 

Marshall,  John,  on  interstate 
commerce,  454;  on  the  cor- 
poration,  110 

Maryland  "  blue  sky "   law,  589 

Massachusetts,  control  trusts, 
322 ;  manufacturing  corpora- 
tion law,  180 

Massachusetts  Gas  Companies, 
232;  agreement  and  declara- 
tion of  trust,  540 

Massachusetts  Lighting  Com- 
panies,  323 

Mayo  (P.  H.)  &  Bros,  389 

Meat  packing.  See  Packing  in- 
dustry 

Medici  families,  46 

Medium  of  exchange,  period  of 
economic  development,  10 

Mercantile  control  companies, 
347 

Mercantile  establishments,  44 

Mercantile  Stores  Co.,  Inc.,  248, 
348 

Merchant   Adventurers,  257 

Merchants  associations,  258 


604 


INDEX 


Merchants  of  the  Staple,  257 

Mergers,  209,  255;  of  industrial 
subsidiaries,  338 

Michigan  Salt  Assn.,  270 

Midvale  Realty  Corporation, 
124 

Milking    the    corporation,    416 

Mining  charter,  object  clause 
form,   484 

Mining  corporations,  128 

Mining  partnerships,  68 

Minorities,  inadequate  represen- 
tation,  409 

Minority  stockholders,  protec- 
tion, 176 

Minute  book,  193 

Missouri  Pacific  System,  316 

Money  as  medium  of  exchange, 
11 

Money  capital,  12 ;  two  periods.  13 

Money  paper,  80 

"  Money  Trust,"  446 

Monopolies,  coffee,  273;  growth 
of  Amer.  Tobacco  Co.,  383- 
404;  problem,  430;  unfair  com- 
petition,  427 

Morgan,  J.  P.,  328 

Morris,  Edward,  estate,  315 

Morris  &   Co.,  316 

Mortgage  deed  of  trust,  137 

Mortgages,   three   types,    138 

Mountain  States  Telephone  & 
Telegraph  Co.,  210 

Municipal  corporations,  119 

Nagel,  Charles,  258 
Napoleonic  code,  19 
National  Cash  Register  Co.,  428, 

429-430 
National  Cordage  Co.,  426 
National  Harrow  Co.,  276 
National  Lead  Trust,  318 
National  Starch  Co.,  149 
National    Tobacco    Works,    386, 

389 
National    Wall    Paper   Co.,   261, 

423 


National  Window  Glass  Jobbers 
Assn.,  272 

Naval  Stores  Pool,  270 

New  England  real  estate  trusts, 
225,  232 

New  Hampshire,  Business  Cor- 
poration Laws,  151,  156;  Dart- 
mouth College  case,  112 

New  Jersey,  "  bargain  counters  " 
in  charters,  200;  corporation 
franchise  tax,  200;  corporation 
laws,  162,  167,  180,  249;  cor- 
poration reform  of  1913,  435; 
General  Corporation  Law  No. 
51,  204;  holding-company 
charters,  203 

New  York  Bi.scuit  Co.,  426 

New  York  (City),  traction  sys- 
tems,  309.   335 

New  York  Central  R.  R.  Co., 
securities  turnover,  95 

New  York  Life  Insurance  Co., 
414 

New  York  Stock  Exchange,  reg- 
istration and  transfer  rule, 
195 ;  securities  annually  sold  in 
1912-19,  93;  securities  listed, 
par  value  and  per  cent  of  turn- 
over of  certain  large  corpora- 
tions, 94-95 

New  York  Telephone  Co., 
210 

Night  riders,  271 

Non-Partisan  League,  257 

Non-securities,  83,  84;  example, 
85 

North  Dakota,  257 

Northern  Pacific  R.  R.  Co.,  328 

Northern  Securities  Co.,  247, 
328;   charter,  581 

Notes,  short  time,   141 

Obligations,  onerous,  31 

Ocean      transportation,      control 

companies  in,  345 
Offene   Handelsgesellschaft,  67 
Officers,    cori)orations,    116,    189; 


INDEX 


605 


joint  stock  companies,  105; 
oath,  form,  531 ;  responsibili- 
ties indefinite,  411 

Ohio,.  Stand.  Oil  Trust  and,  321- 
322,  407 

Open-price  pools,  277 

Operating  trust.  232 

Option  agreements,  475 

Options,  form  of  agreement, 
476;  on  stock,  477;  stock, 
form  for,  478 

Oregon  Short  Line  R.  R.  Co., 
328 

Organizations,  3;  common  law  as 
basis,  22;  concept  of  capital 
and,  8;  domestic  and  foreign, 
22;  impersonal,  theory,  77; 
large  scale  production  and 
competition,  influence,  17;  le- 
gal foundation,  18;  personal 
and  impersonal  element,  77; 
personal  ownership,  34 ;  securi- 
ties-issuing, 34 

Ostensible  partners,  63 

Output,  curtailment,  268,  282 

Over-capitalization,  148,  413; 
prominent  examples,  149;  re- 
adjustment, 418 

Ownership,  personal  and  imper- 
sonal, 34,  35;  securitization  of, 
97 

Ownership  organizations,  16; 
abuses  and  attempts  to  rem- 
edy them,  407;  character  in 
manufacturing  establishments, 
89;  classification,  34;  compar- 
ative qualities,  22;  federal 
acts  regulating,  439;  federal 
laws  and,  20;  future  policj^, 
449 ;  individual  withdrawal 
from,  26;  involuntary  dissolu- 
tion, 27;  legal  status,  32; 
method  of  formation,  23;  ob- 
ligations, 31 ;  sphere  of  activ- 
ity, 33;  state  laws  and,  21; 
voluntary  dissolution,  26 

Ownership   paper,   83 


Packing  industry,  430;  com- 
panies and  interests,  343; 
Federal  Trade  Commission  re- 
port on,  324;  intermediary 
control,  312,  313,  315 

Paper.    See    Commercial    paper 

Par  value,  124,  434;  of  trust 
certificates,   224,  225 

Parent  company,  205 

Paris  Chamber  of  Commerce, 
261 

Participating  bonds,  139 

Participatio,  46 

Participation,  kinds,  through 
substitution   of   securities,  293 

Participation  associations,  39, 
45;  definition  and  nature, 
47  ;i  dissolution,  50 ;  legal  status, 
49;  limitations  and  uses,  50; 
management  and  direction,  49; 
property  and  liability,  48;  sig- 
nificance, 51 

Participation  companies,  292, 
293 

Participation  control,  303,  304, 
307;  instruments,  308;  modes, 
310 

Partners,  classification,  63;  lia- 
bility for  debts,  61 ;  obligation 
toward  third  parties,  61 ;  rights 
and  obligation  to  one  another, 
56;  withdrawal,  methods,  78; 
withdrawal  of  one  or  more, 
64 

Partnership   associations,    67,   85 

Partnerships,  51,  52;  agreement 
form,  461 ;  alteration  of  agree- 
ment, 62 ;  capital  and  property, 
59;  classification  and  types, 
65;  contract,  53;  creditor's 
satisfaction,  62;  decline  in  im- 
portance, 71;  definition,  52; 
desirable  qualities,  72;  direc- 
tion and  nmnagement,  57; 
dissolution,  64;  dissolution  no- 
tice, form  of,  466;  extent  of 
use,  70;   formation,  53;   forms 


606 


INDEX 


pertaining  to,  461;  joint  ad- 
ventures, 69;  legal  nature  and 
legal  actions,  56;  limitations, 
71;  limited,  67;  mining,  68; 
ordinary,  67;  participation  as- 
sociations and,  47;  participa- 
tion in  assets,  profits  and 
losses,  59;  sphere  of  activity, 
64;  termination,  64;  time  of 
beginning,  55;  trading  and 
non-trading,  66 ;  underwriting 
syndicates,  69;  universal,  gen- 
eral or  special,  66;  unlawful 
enterprises,  54;  withdrawal  of 
partner,    form    of    notice,    466 

Patent  medicines,  273,  284 

Patent  pools,  276 

Patents,  146 

Pennsylvania  R.  R.  Co.,  124, 
203;  stock  certificate  form, 
489,    490 

Pennsylvania  System,  203 

Perpetuities,  rule  against,  227 

Personal  control,  elimination, 
97 

Personal  ownership  organiza- 
tions, 34;  types,  39 

Peruzzi,  46 

Petroleum  finance  companies, 
European,    376 

Pfingst,    Doerhoefer   &    Co.,   385 

Pierce-Fordyce  Oil  Assn.,  102; 
articles  of   co-partnership,  467 

Pig  iron,  248 ;  German  Syndicate, 
283 

Plug  tobacco  war,  388 

Plumb  Plan,  441 

Pools,  254,  265;  agreement,  typi- 
cal form,  557;  American  his- 
tory, 265-266;  central  purchase 
of  total  supply,  272;  central- 
ized or  joint  sales  plan,  270; 
classes  and  methods,  266;  cur- 
tailment of  output,  268;  open- 
price,  277;  patent,  276;  per- 
centage division  of  business, 
266;  price  fixing,  273;  railroad 


freight  rates,  275;  stock,  175; 
territorial  division  of  market, 
269 
Portland  Cement  Assn.,  278 
Powder  manufacturers,  269,  345 
Powder  Trust,  428 
Powell,  Smith  &  Co.,  394 
Preferential    arrangements,    262. 

264,  429 
Preferred     stock,     131;     charter 
clause,    forms,    486;     cumula- 
tive, 133;  English  special  kind 
135;    of    no    par    value,    134 
preference    as    to    assets,    133, 
preference     as     to     dividends. 
132;    redeemable,    134;    repre- 
sentative   types,    486;    voting 
power,  133 
Pre-incorporation  agreement,  152 
President  of  corporation,  190 
Price  control  agreements,  254 
Price  cutters,  275,  277 
Price  cutting,  local,  428 
Price-fixing  pools,  273 
Price  reduction,  242 
Private  property,  5,  39 
Privileges,  rights  and,  6 
Production,   large-scale,    17,  238, 
239;     restriction     in     German 
kartells,  282 
Professions,  corporations  in,  199 
Profit  sharing,  43 
Profit-sharing  bonds,  140 
Promoters,  243,  250,  251 ;  profits, 

416;    regulation,   450 
Promotions,    abuses,    411;     four 

steps,  356;    unwise,  412 
Promptness  of  action,  30,  42 
Property  dividends,  187 
Proprietary  companies,  294 
Propri(>tary  Drug  Pool,  273 
Proprietorship,     individual,     39; 
See  also  Individual  proprietor- 
ship 
Proxy,  129,  528;  abuse  of  privi- 
lege, 410;   general  and  unlim- 
ited, form,  528;  revocation  of 


INDEX 


607 


proxy,  form,   528;   voting  by, 
174 
Public,    attitude    and    interests, 

452 
Public  utilities,  control  corpora- 
tions among,  335 
Pujo  Commission,  407,  415,  446 
Purchase-money  bonds,  138 
Pyramided   control,  308;    Atlan- 
tic Coast  Line,  313,  314 ;  Rock 
Island  System,  313,  314 

Quasi-corporations,  68 

Queen  and  Crescent  Route,  in- 
tercorporate relations,  333,  334 
(diagram) 

Quorum  at  stockholders'  meet- 
ings, 171 

Railroad  equipment  companies, 
close  interrelation  with  banks 
and  railroads  (chart),  opp.  416 

Railroad  Wage  Board,  441 

Railroads,  capitalization  in  the 
United  States,  147,  148;  close 
interrelation  with  financial  and 
railroad  equipment  companies 
(chart),  opp.  416;  consolida- 
tion plan,  441 ;  contract  con- 
trol, 305;  control  companies, 
327;  freight  rate  pools,  275; 
Germany,  financing  companies, 
374;  investment  holdings,  299; 
joint  control,  311;  Transporta- 
tion Act  of  1920,  440 

Rates.    See  Freight  rates 

Reading  Co.,  308 

Real  estate  tru.sts,  225,  232 

Rebates,  264,  429 

Record  Stockman  Publishing  Co., 
315 

Redeemable  preferred  stock,  134 

Reform,  432;  Systematic,  434 

Registrar  of  stock.  170,  195 

Regressive  voting,  174 

Regulation,  432 ;  of  corporations, 
122;    state,  432 


Reorganizations,    418,    420;    cor- 
porations, 117;  over-capitaliza- 
tion and,  149 
Reports,  31,  32;  corporations,  118 
Representative    government    of 

corporations,    196 
Republic  Iron  and  Steel  Co.,  249 
Responsible  management,  433 
Restraining   contracts,   429 
Restraint  of  trade,  247,  322,  430 
Retail  stores  companies,  347 
Retailing,  44 
Rhode    Island    corporation    law, 

180 
Rice  as  medium  of  exchange,  11 
Rights,   146;   privileges  and,  6 
Rigidity  of  investments,  79 
Riker  &  Hegeman  Co.,  352 
Ripley,  W.  Z.,  268 
Risk,  12 

Rock  Island  Co.,  308,  417 
Rock  Island  System,  pryamided 

control,  313,   314 
Ruhr  coal   mines,  72 
Ryan,  A.  A.,  426 

St.  Lawrence  Securities  Co.,  368 
Salt   producers'   pool,   270 
Scotten  (Daniel)  &  Co.,  389 
Scrip  dividends.  187.  423 
Sears,  J.  H.,  227;   directions  for 

trust  agreements,  230 
Secrecy,   29;    participation  asso- 
ciations, 47,  49,  50 
Secret  partners,  63 
Secretary  of  corporation,  192 
Securities.  14,  83,  84,  85;  as  capi- 
tal, 16;   as  commercial  paper, 
80;     classes     ordinarily     used, 
142;  extent  of  use,  86;  general, 
124;    inflation,    146;    liquidity, 
93;   nature,  77;   new  issues  in 
the  U.  S.  in   1913-20,  91;   re- 
cent progress  in  issuance,  90; 
statistics  of  issues  by  countries 
in  1909-11,  87;  transferability, 
92 


608 


INDEX 


Securities-assumption  companies, 
358,  360 

Securities-combinations,  254 

Securities-holding  corporations, 
202;  charter  of  Northern  Se- 
curities Co,  581 ;  laws  as  to, 
203,  204;  prominent  examples 
and  dates  of  formation,  203 

Securities-holding    principle,   204 

Securities-issuing  organizations, 
34;  forms  pertaining  to,  467; 
types,   98 

Securities-issuing  trust,  99 

Securities-substitution,  205,  208, 
290 

Becurities-substitution  companies, 
16,  254 

Securitization,  204,  294;  prin- 
ciple of,  97 

Serial  payment  of  bonds,  139, 
140 

Settlors,  214 

"  Seven  Sisters,"  435 

Shareholders,  joint  stock  compa- 
nies, 104;  resolution  authoriz- 
ing consolidation,  form,  573; 
see  also  Stockholders 

Sherman  Anti-Trust  Act  of  1890, 
245,  262,  266,  278,  322,  407; 
description,  442;  text  of  the 
act,  586 

Sherwin-Williams  Co.  of  Canada, 
486 

Shingles,  268 

Shoe   industry,   246 

Short  time  notes,  141 

Shredded  Wheat  Co.,  430 

Signatures,  corporate,  forms,  536, 
537 

Silent  partners,  29,  63 

Simple  corporation,  201,  202 

Sinking  fund,  139 

Sleeping  partners,  63 

Smelters'  Securities  Co.,  366 

Snuff  business,  392 

Social   custom,   5 

Social  revolution,  27 


Societa  per  azioni,  100 

Societe  anonyme  par  actions,  100 

Societe   en   commandite,   67 

Societe  en  nom  collectix',  67 

Societe  en  participation,  47 

Sorg  (P.  J.)  Co.,  388 

South  Africa,  mining  finance 
companies,  376;  mining  indus- 
try, 252 

Southern  Pacific  Co.,  328,  332; 
leasehold  control,  306 

Southern  Pacific  R.  R.,  kinds  of 
outstanding  securities,  142 

Southern  Pacific  System,  332 

Southern  Railway  Co.,  310 

Special  finance  and  assumption 
companies,  358,  359 

Special  mortgage  bond,  138 

Special  partners,  63 

Specialists,  43 

Specialization,  30 

Speculation,  50,  96,  251,  423;  life 
insurance  companies,  414; 
three  kinds,  425 

Speculators,  classes,  424 

Sphere  of  activity,  33 

Stability,  25 

Standard  Envelope  Co.,  429 

Standard  Oil  Companies  in 
states.  320 

Standard  Oil  Co.  of  New  Jersey, 
description  of  control  organ- 
ization, 339 

Standard  Oil  Trust,  176,  206,  211, 
216,  229,  234;  agreement  oi 
1882,  318,  319  (diagram); 
agreement  with  supplemental 
agreement  of  1882,  560;  con- 
ception, 318;  large  fine  for  re- 
bates, 429;  local  price  cutting, 
428;  Ohio  state  attack  on, 
321-322,  407;  preferential  ar- 
rangements,  264 

State  control.  453 

States,  limited  liability  organiza- 
tions and,  32;  regulation  of 
business,  20,  21 


INDEX 


609 


Status,  legal,  32 

Statute  law,  18 

Steel  Erectors'  Assn.,  278 

Steel  industry,  Gary  dinners  for 
price  fixing,  278;  necessity  of 
capacity  production,  239 ; 
pools,  267;  See  also  U.  S.  Steel 
Corporation 

Steel  Rail  Pool  of  1887,  267; 
form   of   agreement,   557 

Stephenson,  C.  F.,  317 

Stevens,  W.  H.  S.,  262;  on  ex- 
clusive arrangements,  263;  on 
unfair  competition,  428 

Stinnes,  Hugo,  253,  285 

Stock  certificate  book,   193,   194 

Stock  certificates,  126;  bond  of 
indemnity  for  reissue  of  lost, 
form,  495 ;  common  stock  with- 
out par  or  nominal  value, 
form,  494;  common  stock  giv- 
ing terms  of  preferred  issue, 
form,  493;  forms,  488;  lost, 
form  of  notice  of  stoppage  of 
transfer,  495 

Stock  dividends,  90,  186;  income 
taxes  and,  187 

Stock  exchanges,  92 

Stock  ledger  and  transfer  book, 
193,  194 

Stock  pools,    175 

Stock  transfer,  439 

Stockholders,  167;  chart  showing 
distribution  in  the  United 
States,  168;  classification,  169; 
common,  rights,  129;  fluctua- 
tion in  personnel  and  numbers, 
167;  in  corporations,  115;  in 
corporations,  liability,  130;  ir- 
responsibility, 410,  meetings 
for  organization,  155;  minority, 
protection,  177;  of  record,  170; 
powers  as  a  body,  168;  pro- 
tection, 451 ;  protection  af- 
forded by  by-laws,  164;  quali- 
fication, 169;  sale  of  assets, 
form  of  resolution,  538;  trans- 


fer  book,    194;    voting   trusts, 
175 

Stockholders'  meetings,  171,  522; 
call  and  waiver  for  first  meet- 
ing, form,  523;  notice  of  regu- 
lar or  annual  meeting,  form, 
524;  officers  and  quorum,  171; 
president's  call,  form,  525; 
special,  525;  special  meeting 
by  call  and  waiver,  form,  527; 
stockholders'  request  for  spe- 
cial meeting,  form,  526;  voting 
methods,  172 

Stocks,     13,     14,     83,     86,     124 
brokers',  96;  classification,  128 
common    and    preferred,    128 
case  of  transfer,  409;  full-paid 
and  part-paid,  126;  issued  and 
unissued,    125;    manipulation, 
414;    option   on,   477;    option, 
form   for,   478;    percentage    of 
turnover,  167;  preferred,  char- 
ter   clause,    forms,    486;    pre- 
ferred    representative     forms, 
486;  real  value  of  shares,  125; 
registrar,    170;    transfer  agent, 
170;     treasury     stock,     127; 
watered,   127,  145,   186,  413 

Stogie  business,  396 

Straight  ballot,   172 

Structural  Steel  Assn.  of  1897, 
267 

Stutz  Motors  Corporation,  424, 
426 

Subdivision  of  legal  title,  205 

Sub-partnerships,  68 

Subscription  lists,  193,  194,  478 

Subsidiary  company,  205 ;  abuse 
of  the  principle,  207 

Substitution  of  securities,  205, 
208,  290 

Sugar  industry,  financing,  309, 
366 

Sugar  Refineries  Co.,  318 

Sugar  Trust,  318;  attack  on.  321 

Supply,  pools  for  handling  total, 
272 


610 


INDEX 


Supply  and  demand,  maladjust- 
ments, 238 
Supporting  the  market,  414 
Surplus,    undivided    profit    and, 

422 
Swift,  Edward  F.,  317 
Swift  &  Co,  315,  316,  317 
Switzerland,   combinations,    253 ; 

finance  companies,  378 
Syndicates,  254,  265,  278;  under- 
writing, 69 

Taft,  W.  H,  258;  on  trusts,  455 

Taxes,  31,  32;  corporations,  118; 
trusts,  228 

Teilhaberschaft,  72,  85 

Telephone,    146 

Telephone  combination,  247 

Telephone  companies,  335 

Tenth  amendment,  19 

Territorial  division  of  market, 
269 

Textile  Alliance  Export  Assn, 
271 

Thyssen,  August,  253 

Tin  Plate  Assn,  of  1900,  267 

Tinfoil  business,  394 

Title.    See  Legal  title 

Tobacco  as  medium  of  ex- 
change, 11 

Tobacco  industry,  English  com- 
panies, 397;  growth  of  Amer. 
Tobacco  Co,  383^04;  inter- 
national agreement,  269;  pro- 
tective pool,  271 

Tobacco  Trust,  dissolution,  402; 
organization  (chart),  401 

Total    Supply,   272 

Trade  associations,  259 

Trade  combinations,  245 

Trade   Gilds,  256 

Trade  unions,  7 

Trading  monopolies,   107 

Transfer  book,  stockholders',  194 

Transferability  of  securities,  92 

Transfers  of  stock,  170,  439; 
abuse,    409 


Trans-Missouri  Freight  Assn., 
275-276 

Transportation,  economic  growth, 
9 

Transportation  Act  of  1920,  440 

Treasurer,  bond,  form,  532;  of 
corporation,  191 ;  dividend  no- 
tice, form,  534 

Treasury  stock,  127 

Trust  agreement,  214;  directions 
as  to  what  it  should  contain, 
230 

Trust  certificates,  221,  224 

Trust  companies,  358;  finance 
operations  as  cause  of  failures, 
358 

Trust  estate,  213 

Trust  on  shares,  99 

Trust  shares,  83,  86,  224 

Trustees,  213,  214,  215;  as  man- 
agers, 215;  compensation,  220; 
control  through,  313;  in  joint 
stock  companies,  105;  liability, 
217;  number,  appointment, 
216;  removal  and  successors, 
217 ;  stockholders'  voting 
trusts,  175;  subscription  list, 
form,  479 

Trusts,  agreement  and  declara- 
tion of  trust  of  the  Mass.  Gas 
Companies,  540;  as  control 
companies,  318;  beneficiaries, 
220;  capital,  224;  combination 
trusts,  176,  232,  233;  court  of 
equity  and,  220,  228;  creditors' 
rights,  226;  definition,  213; 
dissolution,  228;  duration,  227; 
formation,  214 ;  good  and  bad, 
430-431;  holding  trusts,  232, 
233;  investment  trusts,  232, 
234;  kinds  — active  and  sim- 
ple, 213;  legal  status,  321; 
legislation  against,  322;  miscel- 
laneous features,  227;  operat- 
ing trusts,  232;  present-day, 
322;  President  Taft  on,  455; 
right  to  sue  and  be  sued,  219; 


INDEX 


611 


scope  of  activity,  228;  struc- 
tural elements,  214;  taxation, 
228;  three  types,  232;  uses 
and  advantages,  229;  voting, 
status,  175;  Wilson  Tariff  Act 
of  1894  and,  443 
Tying   contracts,   254 

Underwiiting,  profits,  415 

Underwriting  s>'ndicates,  48,  69, 
357,  379;  See  also  Finance  and 
assumption  companies 

Undivided  profits,  422 

"Uneeda,"  146 

Uniform  Stock  Transfer  Act,  439 

Union  Pacific  R.  R.  Co.,  299,  328, 
332 

Union  Pacific-Southern  Pacific 
System,  330 

United  Cigar  Stores  Co.,  348,  352, 
396,  397;  securities  turnover, 
95 

United  Coal  Tar  Refining  Co., 
269-270 

United  Drug  Co.,  248,  348,  352 

United  Paperboard  Co.,  487 

United  Retail  Stores  Corpora- 
tion,  135,   248,   348 

United  Shoe  Machinery  Co.,  246 ; 
exclusive  arrangements,  264 

U.  S.  Envelope  Co.,  487 

U.  S.  Finishing  Co.,  422 

U.  S.  Leather  Co.,  96,  170,  210- 
211,  419-420,  425 

U.  S.  Realty  Co.,  421 

U.  S.  Realtj'  &  Construction  Co., 
149 

U.  S.  Rubber  Co.,  425;  securi- 
ties-turnover, 95;  imderwriting 
profits,   415 

U.  S.  Shipbuilding  Co.,  123,  149, 
309,  353 

U.  S.  Steel  Corporation,  126,  184, 
186,  203,  251 ;  amended  certifi- 
cate of  incorporation,  573; 
bond  conversion  plan  of  1902, 
419;     brokers'    and    investors' 


stock,  96;  by-laws  (as  standard 
form),  503-518;  description  of 
control  organization,  341 ; 
dummy  incorporation,  157;  ex- 
port association,  272;  financial 
policy,  417;  financing  a  sub- 
sidiary, 359;  Indiana  Steel 
Co.  and,  206;  intermediary 
control,  312,  313;  kinds  of 
outstanding  securities,  142 ; 
mergers  and  amalgamation  of 
subsidiaries,  338;  number  of 
common  stockholders,  167;  or- 
ganization as  of  1919  (chart), 
344;  over-capitalization,  148, 
149;  securities-turnover,  95; 
stock  certificate  form,  491,  492; 
subsidiaries,  206 ;  subsidiary 
incorporation,  338;  suit  against, 
249;    underwriters'   bonus,  415 

Universal  Portland  Cement  Co., 
206 

Untermyer,  Samuel,  on  corpora- 
tion laws,  431 

Upper  Silesian  Coal  Syndicate, 
281 

Usury,   12 

Valorization,  272,  273 

Vertical  combination,  244,  245, 
248 

Vice-president  of  corporation, 
191 

Voting,  by  proxy,  174;  stock- 
holders' meetings,  172 

Voting  control,  303,  308 

Voting  trustees'  certificate,  form, 
521 

Voting  trusts,  233,  304.  309; 
form  of  agreement,  519;  stock- 
holders,  175 

Waltham  Watch  Co..  428 

Wampum,  11 

War    Finance    Corporation    Act, 

448 
Wash  sales,  415,  430 


612 


INDEX 


Washington   Branch   Road,  203 
Washington    Red-Cedar    Shingle 

Assn.,  268 
Watered  stock,  127,  145,  186,  413 
Webb  Act  of   1918,  271;   provi- 
sions, 447 
West  India  Sugar  Finance  Cor- 
poration, 309,  366 
Western  Electric  Co.,  337 
Western  Export  Assn.,  268 
Western  Telephone  &  Telegraph 

Co.,  337 
Western    Union    Telegraph    Co., 

337 
Westinghouse  Mfg.  Co.,  361 
Westinghouse  Electric  and  Mfg. 
Co.,  417 


Westphalian  Coal  Syndicate,  284 

Weyman-Burton  Co.,  487 

Whiskey,  268 

Whiskey  Trust,  318,  321,  426 

Whitlock,  Philip,  386 

Wilson,  Woodrow,  on  New  Jer- 
sey corporation  laws,  435 

Wilson  Tariff  Act  of  1894,  443 

Wind  River  Refining  Co.,   125 

Window  glass  pool,  272 

Withdrawal  from  partnerships, 
methods,  77 

Wright    (John)    Co.,  389 

"  Wrigley's,"  146 

Yellow  Pine  Assn.,  278 


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This  book  is  DUE  on  the  last  date  stamped  below. 


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